The Mortgage Man

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Bailout Bill…Round 2

The senate is putting together a new version of the bill that failed earlier this week.

Reports from Washington are that the senate has been feverishly re-tooling the bailout bill with adjustments that will make it more palatable for the public and more likely to pass through the House of Representatives.  Early reports are that an increase in FDIC insurance for bank deposits is being increased for the first time since 1980 from $100,000 per depositor to $250,000.  With the national average bank balance being around $5000, this will have little practical affect on consumers.  But, it can help small businesses feel more secure, and the overall perception is likely to show that there is more for the common tax payer than the original version.

It is not yet clear what other components have been added or removed, but there is no doubt that the pressure is on Washington to do something based on the reaction of the stock market this week.  Also, given an unprecidented amount of discontent towards any bailout plan (some reports say as many as 80% of tax payers are violently opposed to the bill), there is no doubt that those who vote for it should read it carefully as the outcome will likely dictate their fate in November.

I do find it interesting how much the public misunderstands the significance of passing legislation to help this problem.  I was listening to talk radio locally here in Pensacola yesterday, and the overall sentiment is still that there is no incentive to the tax payer and that this simply bails out millionaires that made bad decisions.  Unfortunately, the actual problem is much more detrimental to the overall economy than most people realize or even understand.  For instance, many small businesses rely on credit to run their daily operations.  For a car dealer, it is their line of credit that they use to purchase inventory to put on the lot.  For the plumber that wins a bid for a large job, they need access to credit lines to purchase inventory to be able to start the job.  Given that 80% of all americans work for a small business (defined by a company with 200 or less employees), the amount of layoffs and jobless claims as a result of the business being unable to grow could be more than we have ever seen in this country.

This problem began with the deregulation of mortgages through Congress during the Clinton administration in the late 90’s, and became a widespread problem as banks were forced to make loans to certain low income borrowers or face economic sanctions from the government.  It was understood that a percentage of these mortgages would fail at the time that they were originated, but that was understood as the cost of doing business on the part of lending institutions.  This is not when Subprime loans were born, but it certainly gave them the steroids to go into the wildly risky direction that they were 3 or 4 years ago.  I’m sure you won’t hear much in the news about this because no one in Washington would ever willfully take responsibility for something that had a negative affect on the economy.  In fact, most of our elected officials do not understand the financial markets enough to even know that they created the problem.  Now that the chickens have come home to roost, it is Congress that has to clean up its mess.

No one wants government intervention less than I do.  But, the cost of a lack of action is far greater than the cost of any bill that may be passed.

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