Thoughts.com Blogs - Lenders And Borrowers Should Pay For Their Choices

View Blog

Lenders And Borrowers Should Pay For Their Choices

America’s on the verge of a larger lending meltdown according to one economist. I don’t know Nouriel Roubini’s fiscal philosophy, but I’ll assume its reasonable until proven otherwise. Therefore, taken at face value, this is a little disturbing, though spot on, I think:

The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron’s in Sunday’s edition.

Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said — at least $1 trillion and more likely $2 trillion.

The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron’s reported.

He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.

U.S. consumers, meanwhile, are “shopped out” and saving less, while the Federal Reserve’s performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.

Now, Roubini told Barron’s, the government is overregulating, bailing out troubled participants and intervening in every market.

I even agree with Professor Roubini’s prescription:

“The regulators should investigate themselves for bailing out Fannie Mae and Freddie Mac, the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities,” he told Barron’s. “It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich.”

He said that sometimes it is necessary to use public money to rescue institutions, but in a way that does not bail out the people who made the mistakes. “In each one of these episodes, the government bailed out the shareholders, the bondholders, and to some degree, management,” Roubini told Barron’s.

Indeed; let these foolish lenders and borrowers twist in the wind–so long as they don’t become wards of the welfare state in the process. Certainly, President Bush and his administration helped create the problem. Telling Americans in the aftermath of the WTC and Pentagon bombings that they should, effectively, consume themselves out of the economic consequences was the wrong mindset to create. As some Marines in Iraq noted a few years back, “The Marine Corps is at war–America’s at the mall.” Leave it to the Marines to distill complex social problems into simple wisdom.

The past is now a stubborn fact, however, and the path ahead should be guided by the principle of not throwing good money after bad. As Benjamin Franklin noted, “All the Constitution guarantees is the ‘pursuit of happiness’; you have to catch up with it yourself.” Let these fools fall and make them pick themselves up, learn from their mistakes, and resume the race; don’t give them a lift at taxpayers’ expense to the finish line.