Let The Banks Fail

Having previously supported TARP 1.0, the first round of financial bailouts that poured $350 billion dollars into an emergency backstop for the nation’s private banking system, I’ve changed my mind on any future federal intervention short of outright receivership for failed banks. It is difficult to justify all of the original TARP spending, even though some of the funding did contribute to preventing a full scale financial panic. Many of the TARP assisted banks were healthy financial institutions that intend to use the government financing to make acquisitions and consolidate weaker banks in their operating territory (a good strategy, but one that should be executed with private sector capital, not tax payer money).

However, as with any large federal spending program, political ambition has trumped all other interests as politicians find newer and better ways to expand their power even if they have to make it up as they go along. President Obama’s mortgage relief plan ($350 Billion plus) is but the latest grand plan (eerily similar to the Five Year Plans frequently trotted out by the Soviets years ago) to save debt burdened taxpayers that made poor financial decisions in the home buying roulette that has gone unabated since 1995.

To understand what a total waste the $350 billion mortgage bailout is, take a look at this chart. If Robert Schiller is correct, then we have a long way to go before housing prices reach any sort of equilibrium. As James Quinn noted:

As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

Since last fall, the federal intervention in the financial crisis can be summed up as follows:

  • 1) TARP $700 billion
  • 2) Stimulus $1.2 trillion
  • 3) Obama mortgage bailout $350 billion
  • 4) Undisclosed Federal Reserve lending to banks and brokers $2.5 trillion (est.)

Total: $4.750 trillion

As Baron noted the other day, they haven’t even started on the next budget bill yet.

It remains to be seen if President Obama understands that Congress is carrying him over a steep cliff with these gargantuan spending programs. The solution to the current financial crisis is, as Senator Bob Corker (R-TN) noted yesterday, to take our medicine now and get it over with. But the tinkerers and central planners in Congress seem hell bent on extending their Keynesian intrusion into a socialist model that is doomed to failure.

H/T Clusterstock

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