Subsidizing Bad Ideas
By Howie Rich
As far as costliness goes, the $75 billion proposed by President Barack Obama to provide “mortgage assistance” to a select group of Americans is a small drop in a much bigger bucket of government interventionism.
After all, with $11 trillion of our money already pledged over the last five months toward government bailouts, debt reductions and other central economic planning measures (with at least another $2.5 trillion on the way), $75 billion has become mere “chump change” to the Washington elite.
But this particular pot of money is troubling for reasons that far outweigh its price tag.
First, the plan is emblematic of America's new “dependence mentality,” which is advanced by politicians like Obama who rhetorically extol the virtues that once made this country great while they systematically remove brick-by-brick the incentives needed to make it great once again.
Second, it's more of the same smoke-and-mirrors Washington politicians employ to hide the true coming-and-goings of your tax dollars in our nation's capital.
Third, it rewards many of the same financial institutions whose mistakes have helped bring this nation to the brink of fiscal ruin – and incentivizes them to make those same mistakes all over again.
Consider for a moment what it means to “preserve, protect and defend the American dream.”
We hear language like that from our politicians all the time, don't we?
In fact, we heard it from President Obama when he unveiled his mortgage plan last week, just as we heard it five years ago when ominous warnings were raised about the long-term stability of government-backed (now government-owned) mortgage giants Fannie Mae and Freddie Mac.
(Incidentally, as part of Obama's plan these two government behemoths were set to receive another $200 billion from the U.S. Treasury, on top of the $200 billion taxpayers have already poured into their toxic bureaucracies).
Of course, Obama praised his plan as embodying “those core values of common sense and responsibility … values that have defined this nation.”
Let's examine that statement, shall we?
First, Obama's mortgage assistance plan is accessible by less than 10% of American homeowners – specifically those who have either already defaulted or are on the verge of defaulting on their mortgages. That means the ninety percent of Americans who have managed to stay current on their payments through these difficult economic times get no relief.
In other words, if you played by the rules and worked your butt off to make your payments, you'll soon be subsidizing the mortgage payment of someone who didn't.
Second, this proposal is not “relief for homeowners,” it's another bailout of our bank's bad decisions.
Specifically, financial institutions will receive $1,000 for each mortgage “modification” they perform in addition to $5,000 in principal on each “toxic” asset they own. Not a bad deal if you're in the banking business.
But how, exactly, does Obama propose to modify these “toxic” mortgages?
Amazingly, by using the same ridiculous “zero down” and “exploding adjustable rate” nonsense that helped land us in this mess to begin with.
Instead of learning the “lesson of liquidity” from last year's epic meltdown, Obama's plan provides new incentives for banks to get homeowners to borrow more than their houses are worth, which lenders call “being upside down.”
Also, while Obama's plan slashes interest rates for the most vulnerable borrowers in the short term, after five years these mortgage rates jump to market levels, which is sowing the seeds of yet another crisis when these same borrowers go delinquent on their loans again – as history has proven they will.
America's mortgage mess is a direct result of government incentivizing banks to grant loans to people who could not afford them. How on earth does repeating this same fatal mistake constitute a “rescue?”
A real mortgage solution would be to offer relief to all homeowners by letting them keep more of the money they earn.
It would also involve acknowledging that the American dream is not something you can subsidize through government bailouts – it is something that must be earned by every citizen who aspires to attain it.
The author is Chairman of Americans for Limited Government.