Green Room

The Bailout Singularity

posted at 2:55 pm on August 8, 2010 by

Reuters columnist James Pethokoukis tells us the markets are preparing for a fantastically expensive “August Surprise” from President Obama:

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion… The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses.

This vote-buying scheme would come on top of $400 billion in taxpayer dollars already pumped into Fannie and Freddie… just a few years after Democrats assured us there was “no crisis at Freddie Mac, and particularly Fannie Mae” (Maxine Waters) and the corporations had no “safety and soundness problems” (Barney Frank.)

Fannie and Freddie are among many black holes gobbling up tax money these days.  In the two years since Barack Obama took the bailout football from George W. Bush and ran it several trillion yards, the American economy has degenerated into a massive life support system for its most insolvent components.  Financial institutions, auto companies, and “stimulus” targets have been infused with hundreds of billions taken from taxpayers.  Each new, politically connected corporation declared “too big to fail” becomes a crushing burden on a nation too weary to hold them all up.

This “August Surprise,” presented to underwater mortgage holders by our children on behalf of the Democrat Party, detonates the current line of garbage from panicked liberals… who have been floating a new meme that rampant deficits are caused by insufficient tax revenue.  Spending will always be the problem, because spending is easy.

Politicians like Obama will not hesitate to pile bricks of debt on the back of future generations, in order to buy votes today.  This creates permanent entitlement obligations, which are the only thing today’s government can pass along to its successors.  When each new Congress convenes, debt is its only inheritance.  Democrats are still throwing more I.O.U.s onto a trillion-dollar deficit, even as the interest on our national debt approaches $300 billion per year.

No amount of additional tax income would slow this process down.  For decades, the liberal State has proven that it sees increased income as an opportunity for even more spending.  It never considers reducing its operations, and returning money to the taxpayers.  Remember how all the Democrats magically transformed into deficit hawks when a federal budget surplus appeared in the 90s?  There was never any question of reducing the size of government.  The only alternatives they saw were “irresponsible tax cuts,” or keeping the surplus in a noble attempt to pay down the deficit they were suddenly obsessed with.  This obsession ended the instant it conflicted with their spending urges.  No politically expedient bout of fiscal responsibility will ever lead them to cut up the credit cards they have stolen from us.

Massive bailouts are an extreme form of irresponsible socialist spending.  The proposed Fannie Mae giveaway would not improve the long-term health of the housing or financial industries.  It will produce a very short-term political result, namely making the recipients feel gratitude toward their Democrat sugar daddies in November.  The cost will be long-term, including an increase to those massive deficits, and the vampiric interest payments to service them.  The cost will also be measured in further defaults from Fannie and Freddie clients, who have every reason to expect further write-downs, and in the bitterness of the poor chumps who took out responsible mortgages and made payments on time.

Bailouts produce the same effect on a national scale that welfare causes in individuals.  The bailout subsidizes poor financial practices, and leads to long-term dependency.  The high rollers seated in the boardrooms of companies officially classified as “too big to fail” are not likely to be responsible businessmen.  Why should they be?  They can look out from the boardroom windows and see streets teeming with the millions of saps who will cover their losses.  They’ve purchased political insurance against accountability.

Bailouts also leave unsustainable business models running, like badly-tuned cars with bricks on the accelerator pedals.  General Motors didn’t fail because it wasn’t making decent cars, or enjoying adequate sales.  It failed because it had a ridiculous business model, with union labor costs completely divorced from reality.  This model would have dissolved during normal bankruptcy proceedings.  Instead, taxpayers were looted for billions to keep it afloat.  None of the factors that killed it the first time have changed much.

These are the factors leading to the bailout singularity, in which the productive economy collapses beneath the pressure of feeding its ulcers and tumors.  Every subsidy is a tax on those who don’t receive it.  Risk, investment, and thrift dissipate when they become less rewarding than political connections to the leadership of a command economy.  Expensive plans designed to deny the consequences of mistakes and crimes lead to the blindness of a system that learns nothing from its errors.  A contracting economy will never generate enough blood to sustain an enormous State that knows no limits to its hunger, and refuses to give back anything it takes.

The blood feeding that State is not just money.  It’s liberty.  The individual citizen is given no way to refuse the demands of a government that can’t wait to subsidize favored constituencies.  The right to save, invest, or spend the benefits of our working hours diminishes steadily.  The next titanic bailouts will be for bankrupt states and union pension plans.  I think they will break the system, because either the populace will resist them with absolute force, or the collapse into a lifeless singularity will be complete… and America is not ready to become lifeless yet.

Cross-posted at www.doczero.org.

Doctor Zero: Year One now available from Amazon.com!

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Submitted to the public domain:

A well made short film in the futuristic apocalypse genre.

Ragged humans desperately throw ropes around a giant statue of a former president. A plaque at the base of the statue says: Hope and Change.

The shirtless men’s rib cages show they’re starving to death. Their faces are lifeless.

They secure the ropes, and pull down the statue, which breaks into several large pieces.

The dust settles while the men, without exchanging words, appear to have grasped a moment’s peace. A short little respite from their slow death.

jeff_from_mpls on August 8, 2010 at 3:33 PM

Thre’s another singularity. People keep leaving states like Caliifornia and Michigan, so finally the only people left are the unions, who must tax themselves heavily to pay for their benefits and pensions.

(Of course, assuming the feds don’t bail them out.)

Wethal on August 8, 2010 at 4:02 PM

There is no limits to the skulduggery of Obama …

Buying votes won’t work this time, people are too onto the Obowma.

tarpon on August 8, 2010 at 4:22 PM

A strong voice of reason as always, Doc, but who is listening?

publiuspen on August 8, 2010 at 4:50 PM

Buying votes won’t work this time, people are too onto the Obowma.

tarpon on August 8, 2010 at 4:22 PM

I wouldn’t bet the mortgage on that statement.

chemman on August 8, 2010 at 5:03 PM

Yet.

I am hopeful that you’re right, but fearful how close we are to ‘yet.’

America is much closer to that dead singularity that we were a few months ago.

WashingtonsWake on August 8, 2010 at 8:03 PM

Do you wonder how close to the precipice the average Joe/Josephine citizen will get before they revolt? (Try not to over-interpret revolt)

Many things can happen to the America we love that may pervent a total collapse of the detritus holding that last rock up which lies on the edge of the chasm. In my book they’re called miracles. Freedom itself is a miracle most days as it doesn’t seem to be getting stronger of it’s own accord, what with the thrashing it’s taking from the Progressive Socialists. Will we ever see a Congress that throws all this irresponsible government subsidized maniacal behavior under the bus?

Vote early, vote often.

Robert17 on August 8, 2010 at 8:49 PM

Hopefully, the people who benefit from this latest bailout will not react gratefully and re-elect Democrats, but will start clamoring to pull up the ladder, now that they got theirs.

If Obama comes along and wipes away my debts, I suddenly have an incentive to make sure he doesn’t put me back into debt by buying off the next constituency. Suddenly, I have a lot to lose… So I’m going to vote for the guy who won’t triple my taxes.

It’s not a noble motivation, but if it leads to the correct behavior, I’ll take it.

Haiku Guy on August 9, 2010 at 9:29 AM

I wouldn’t bet the mortgage on that statement.

chemman on August 8, 2010 at 5:03 PM

heh

Jeff2161 on August 9, 2010 at 10:01 AM

I think Rush said it best when he said that a bailout like this would cause Republicans and independents to camp outside of voting booths the last week of October.

Sekhmet on August 9, 2010 at 10:31 AM

In the two years since Barack Obama took the bailout football from George W. Bush and ran it several trillion yards, the American economy has degenerated into a massive life support system for its most insolvent components.

Which, in turn, prevents the market from correcting and the recovery from truly beginning.

Count to 10 on August 9, 2010 at 1:45 PM

Stop paying taxes. Problem solved.

Wine_N_Dine on August 9, 2010 at 4:11 PM

declared “too big to fail”

That would be 837 “too big to fail” Bailout Recipients

Through the $700 billion big bank bailout and an unlimited amount reserved for Fannie Mae and Freddie Mac, there are 13 Bailout Initiatives and Programs

BDU-33 on August 10, 2010 at 4:59 AM

Do you wonder how close to the precipice the average Joe/Josephine citizen will get before they revolt?

Robert17 on August 8, 2010 at 8:49 PM

When the average American can’t afford one or more of the following: beer, fast ‘food’, video games, condoms, cable/satellite TV, wireless Internet.

Until then its bread and circuses.

Dark-Star on August 10, 2010 at 9:57 AM