Bailouts, Class And Social Acrimony

This is making its way around the Internets today.

A couple of comments. First, I can’t exactly disagree with anything he says. Well I mean I disagree with the gross generalizations as most people facing foreclosure don’t exactly live in mansions, but his overall indictment of establishment logic is something I can get behind. That said, I find the video completely surreal. It’s a populist uprising on the floor of a commodity exchange.

And then compare it with this “shrillness”:

Not to get all Marxist or anything, but the class resentment is obvious.

The first video he talks about letting things fall apart so the “responsible” people can come in and pick up the pieces and prosper, and traders around him cheer (it should be noted this is CME, not Wall Street…it does have a bit more of a down to earth culture but still). The implication is that the country is going down the tubes because of misguided bailouts that support the “losers.” Well guess what? The vast majority of the “losers” are hard working Americans that have seen incomes stagnate for the last three decades in the best of times, and get laid off at the first sight of bad times. Much of the increased wealth — that the workers were pivotal in creating — went to the financial class.

The second video of course is railing on about that. But it’s also undeniable that a lot of the very poor decisions that led to our current crisis were made by the middle class as they overextended themselves, and that a downward shift in standard of living is inevitable. You can even make a very good argument that a lot of the middle class people that did make good decisions and anticipated the downturn (cough…) will be punished if everyone gets bailed out. It’s hard not to feel like a sucker by trying to do the right thing. So I can kind of understand the first video’s sentiment, until I sit back and realize that most of their “success” was only because an inordinate amount of the pie has been flowing upwards.

Then of course everyone is mad because the ultra-rich have on average seen the most gains and been the most irresponsible…and they are the ones that are getting made whole first. Heck they haven’t even really cut bonuses. So a lot of real complaints against that reckless behavior (i.e. the first video acting like most people getting mortgage relief had mansions, and the Lansing mayor ripping into Wall Street types in a way where the CME traders could be seen as part of that even though they’re not) inaccurately gets assigned to people that did have different roles.

It’s just a mess and is part of the reason why I think that things will get far worse than most people anticipate. Since I don’t like anyone I propose programs like I mentioned on the recent foreclosure thread by Jerry:

First, calculate the projected price declines based on historical averages and median income. Things always revert to a historical mean and things are still too expensive on average and in some areas still way too expensive.

I am for three steps in increasing order.

Owner declares Chapter 13, and there is an offer to lower principal by whatever amount to get to the projected bottom price + 15-20% or thereabouts. The owner covers one half of the difference (either as a lump sum or increased monthly payments with interest [edit: high interest here like 7-8%] until that extra amount has been covered…of course that’d mean that the monthly mortgage payment would decrease from current levels) and the banks cover the other half. Owner would maintain full control.

If the owner cannot meet those increased payments, then go ahead with foreclosure.

While in foreclosure don’t kick out the owners but instead rent out to them at a monthly rate commensurate with the expected foreclosure recovery amount. If someone buys the foreclosed property then obviously they get to decide whether to kick the owners out or keep them as renters.

The last step is the most radical, which is if they STILL can’t afford the rent at those prices, then the owners have to move out*. If the house doesn’t sell after say 6-9 months, then open up a fraud inquiry into both the buyer and originator and have the government buy the property at a 10% discount and give it to a local trust that can look for renters, have a rent to own program, whatever. *The former occupants could apply to stay in the home with government assistance like Section 8 if no other renters came forward.

Those steps would make sure that the owners, bankers and investors each bear some of the burden, that the banks have it in their best interest to have a workout agreement (with the legal backing of the bankruptcy to shove it down to investors) and that the government eventually will step in at a cutthroat rate and attempt to preserve the neighborhood. Of course everyone will be angry with my plan because it makes pretty much everyone bear some of the responsibility but also there is still a safety net.

The banks will still lose a lot of money, but the government can recapitalize them at a set rate based on the amount that they reduce their exposure through the program (say 30-50%). The government would get preferred shares for the recapitalization. If they need more of a bailout than that, then they should just be declared a failed bank and taken over by the FDIC.

My suggestion is one that I feel more evenly puts the burden on all classes, which is why no one would ever consider it and would be a template for most of the bailouts. The people that did make bad decisions (or even just had bad luck) would lose a lot, but still be able to keep their houses in their name or at the very least have housing. It would allow people that did save their money to come in and get bargains, but prevent complete fire sales. It would make the banks and investors take huge hits — maybe even causing some to fail — but wouldn’t be a complete free-fall. It wouldn’t try to save everyone, but wouldn’t mind spending a lot of resources in order to make sure that people didn’t go hungry or homeless needlessly. In short, it’d make everyone mad and see their standard of living decline, with the people that have saved the most (actual cash, not leveraged assets) and those that are lucky enough not to lose their jobs seeing the most modest declines.