I’m no financial expert, nor do I profess a deep understanding of the US economy (for example, I’ve only been trained in macro and labor economics theory… a far shot from understanding precisely the relationship between the gold rate, interest rates and stock future prices.)

That is a disclaimer of course. Given my lack of comprehensive knowledge, I would like to offer a superficial response to the government “seizing” the two mortgage guarantee companies Freddie Mac and Fannie Mae. But I think this is fine, because while I have a lot of intelligent associates and friends, I am willing to bet that nobody really knows much about these two companies. So I can feel free to write, and look forward to being corrected if I present an inaccuracy:

It would seem that these companies are sponsored already by the US government. As much as I can tell, the government backs up these private companies’ loans. The company itself goes about buying loans, which allows individual banks to extend credit far beyond their own ability to cover, because they know that these private companies, which are guaranteed by the government, will buy them. In exchange, banks make loans to individuals, using criteria set up by these two agencies (provided as conditions under which these loan buyers will actually purchase the loan.) Supposedly this relieves the burden of backing up the credit from the bank (who immediately turns around and sells the loan, keeping a percentage, and therefore making money), while allowing millions of people who would normally have been turned down by an individual bank to buy homes. The criteria provided by these megalithic companies is much laxer than what would be applied by an individual bank, and can be because the investors in the guarentee agency know that their investments will be covered by the government should some catastrophic downturn in the financial market occur.

Well… it has. And the investors in these guarantee agencies have begun wondering where the return on their investments are (these companies have been losing their shirts.) And so of course, the government steps in, and basically nationalizes these two guarantee agencies (it will amount to a bail out, mark my words.) And when the government steps in, the stock market apparently likes that. As of the time of writing stocks are up, world wide. And commentators one television decry socialism in the United States.

Now there are a number of problems with this assessment. First, if there was socialism in the US, there wouldn’t have been private investment in something like this to begin with. I would have applied to the government to get the loan for my house, not a private, profit driven bank, or a private, profit driven guarantee agency. I probably would have still gotten a loan, because while the government wouldn’t make money off of me, the goal of a socialist government would be to provide housing to people, so, whether or not I was a “risky” candidate for a loan would have been irrelevant.

Secondly, the government only intervened to ensure that investors make their money back and get a profit. This is supposed to encourage more investment in these companies, and more investment means more profit for investors. The problem is that these industries weren’t regulated. The only regulation they got from the government was “If you don’t turn a profit, we’ll take you over. But as long as you are turning a profit, speculate away.” Consequently, borrowers were confident that they could get a loan, in most cases for way more than what the house was worth, because they knew that as speculation went, they would end up making money in the short term on their loans. And companies who made these jacked up loans knew that they would make a return on their loans, because people were buying like crazy, and turning around and selling their house in a matter of months. It was all one big get rich quick scheme that only the rich were allowed to play, and it was all done with the understanding that investments were safe, because the government would bail them out. This unregulated market and the subsequent protection of investments is not socialism in anyway. It is unrestrained capitalism, which usually ends in the looting of the public coffers by people who are already rich enough to play the game, to cover their bad bets.

The nature of speculation used to be that if you hit you hit big and if you lose you lose your shirt. Poor people don’t get to play, by the way. I had to jump through hoops with my loan, and I didn’t even get a loan because I am carrying too much student debt. Fine. That’s how poor people are treated. But there was for years free money to be passed out to rich people and for a few years, when property values were doubling in a year, they could make a profit on their speculation (espcially since they were mainly selling to other rich people). But when it all collapsed, because the property itself just couldn’t carry any more value, and then rich people began panicking, those stuck with the loans were supposed to get stuck with them. x-Million people foreclosed on this year in the Bay Area, x-Million will lose their homes on Long Island. Good. Put them all out on the streets. Poor folks like me, who bought a rock bottom priced house are in zero danger of foreclosure this year, because we bought a house within our means to pay. We even have a little money left over to make improvements, so that we can break even when we go to sell. Our house is an investment, but like a treasury investment or a personal savings account, it is a low yield, even money investment. We’ll get out of it almost exactly what we put into it, and that is a good way to do things. Those millionaires who bought houses hoping to flip them need to join my class and figure out how to live on a budget.

So, this is turning into a rant against rich people. I will close it up by saying that it is good that the federal government took over these institutions. They need to take over a LOT more institutions. But given the fact that we’re going to have capitalism for the foreseeable future, the government needs to seriously reconsider its anti-regulation stance. In government they justify the fact that they were bought off by lobbyists by suggesting that regulation hurts small businesses. I answer by saying, “Ok, don’t regulate small businesses. Companies with capital investments of a million of two aren’t big enough to do any serious damage if they fail to return a profit for a quarter or a year. Regulate the hell out of large companies. Make sure their books are always subject to audit. Make sure they are paying their taxes. Make it illegal for them to speculate. Control that shit.” I don’t care if it means they don’t get to return a three digit profit to their investors like they think they should be able to. If they return 7 percent to their investors that’s better than any bank will give.

Beyond overregulation of large companies, allow me to offer one more prescription. This country needs to ensure that the tax burden is fair across the board. The government seems to believe that if the right get tax breaks they will automatically turn around and invest that savings. Sometimes they don’t, but when they do they speculate with it, and that does nothing to improve the economy over time. I say the tax structure needs to be reformed so that net worth is taxed. We can have a flat tax, so long as it is a flat tax of our net value. Here’s how it works. Our mathematical model is [tax=t*(assets-liabilities)] with the t representing whatever the flat personal tax rate is; we’ll say 10 percent for the sake of this discussion. Two people are in our model. One makes 35000 a year, one makes 3.5 million a year. The person who makes 35k a year has a mortgage payment and a car payment, etc. At the end of the year, he is actually worth less than zero, he is in debt. Meanwhile the rich guy owns his house, his car, carries no significant debt and spends his money on luxuries and speculation. Every cent he makes goers to making him more money. If we had a flat tax of 10%, the rich would end up paying 10% of the entire value of the property he owns, and would make 10% from the government on all the debt he has. The same for the poor. At the end of the year, the government would be paying the poor a negative tax, while the rich would pay their share of taxes. I think this would encourage the rich to get busy investing their money in property etc, and acquiring debt, so they get their ratio closer to zero. You want a middle class, this is how you create one, by taxing the rich out of existence and allowing poor people to not pay any taxes, which will allow them to slowly climb out of grinding poverty. For companies, the calculation is similar [tax=t*(capitalization+annual profit)]. This will protect small businesses, and make big companies pay their fair share. This sort of flat tax is extremely progressive, and creates the sort of nation that politicians claim they want, a nation populated by the middle class who have the ability to move up in class and a nation of shopkeepers upon whose backs our economy supposedly rests. All individuals pay the same tax rate, all companies pay the same tax rate. It is the stuff within the parentheses which changes to total tax owed.

This country will look more socialist if the government put into action these prescriptions, based on a cursory understanding of economics. And if it means some companies go out of business, because they survive only because of corporate welfare, that’s too bad. The economy will be closer to free market if that happens.

Tags: bailout, Fannie Mae, Freddie Mac, government, mortgage, socialist, speculation