Thursday, October 02, 2008

The Bailout Bill: Now Dems Believe in "Trickle Down" Economics

I'm suprised that no one has picked up on this yet. This whole "bailout" bill is based on "trickle down" economics, and the Democrat leadership has to explain it, and promote it. While conservatives were concerned about the amount of government intrusion into the private sector, they understand the principle of saving, or assisting large companies, because it usually helps the average person. They just wish the private sector to do it.

None of the Dem leadership was comfortable in this role, and it's probably why Speaker Pelosi unleashed that tirade in the House the other day. She, and the other leaders (Frank and Dodd chief among them) who have been painting this as "bailing out the Bush policies" are deflecting blame from their own actions, which also prove the "trickle down" theory.

This "bailout" bill is the "other shoe" of one that dropped more recently: The Fannie/Freddie bailout bill. I don't remember any of these leaders decrying that one as strongly in the debate leading up to this bill. Mostly, they said all the right, "bipartisan" things, though a few tried to blame the GOP for Fan/Fred's "deregulation." Unfortunately, it wasn't GOP deregulation that caused Fan/Fred to back all these bad mortgages. It was liberal Democratic regulation that forced them to "give homes" to people that couldn't afford it. (Say Anything has the details, hat tip to Rob)

Deregulation did have a role, of course. It enabled Fan/Fred to package these mortgages in very complicated and creative ways, and to sell them as securities. These are free-market mechanisms for reducing "risk" by spreading it around. Boy, and did they ever "spread it around." Fannie/Freddie sold these securities to all of the big investment banks, worldwide.

How does this relate to "trickle-down" economics? Well, when the US government "stimulates" an industry that's already diong fine, it creates a "bubble." The "trickle down" effect was to make poor and middle-class people homeowners, and it worked. It also drove home prices higher, as the market was flooded with buyers. This should have caused interest rates to rise, but the Fed was hoplessly biased to keeping interest rates low, perhaps for political reasons ( I'll write about that another time).

The bubble burst when prices started declining, and people owed more on their homes than their home's current value. This coincided with a harsh increase in inflation, which the government has been outright lying about, in their "official" numbers, for years (yes, longer than the Bush administration, but again, that's another story). So the people who received the good "trickle down" effect were the first to feel the bad "trickle down" effect.

When they started defaulting on their loans, the assets that backed those loans were not worth what was owed. Eventually, this "trickled" back up the economic food chain. The banks didn't actually "own" those mortgages anymore. They had sold them to Fredie or Fannie, who had sold them to investors from all over the world. All of a sudden, banks in China, Europe, and Russia are in trouble, and it's "trickling down" to their average citizens.

Now, after bailing out Fan/Fred to the estimated tune of $200 Bil, all of the people who bought their bad paper over the past decade are saying "where's my bailout?" That $200 Bil was only the mortgages that Fan/Fred were holding, and by agreeing to buy them, we implicitly told all past customers of theirs that we would buy back whatever bad things they sold. We're making that explicit now, and you know who's paying the $700 Bil bill for this bill. You and me.

There is a bright side to all of this. Americans who go through crises often come through it stronger, and wiser. This goes for the nation as a whole, in general. More people will understand our economy, and government's limitations in controlling it, because of this "crisis." I'm not sure if I'm for or against the plan, to be honest. I just know that it isn't the last "shoe" to drop, and that "bipartisan quick fixes" usually do more harm than help to the economy.

Meanwhile, the holdouts seem to be conservatives, and liberals, but the leadership is being persuasive. They even suggested that "the taxpayers could make a profit on this investment," as if the taxpayer would actually see any of those "profits." Maybe this is how Obama will pay for universal health care. It's about as rational as inflating tires to bring gas prices down. He cited FDR's buying of mortgages in the '30's as a "stabilizing influence." He's right, FDR's various policies "stabilized" us in an international economic depression.

I've got a question for Sen. Obama. Beside the strain this bailout will put on our budget, will you fix the looming crises in Medicare and Medicaid funding, before you try to implement universal health care? While it sounds off-topic, think of the current crisis as the Dems attempt at "universal home-ownership." "Trickle down" applies to the public health care industry, as well. It may be about to overflow, as well, with more disatrous consequences than Fannie/Freddie.

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