Thursday, August 5, 2010

That Sinking Feeling in your Gut

Think things couldn't possibly get worse in American politics?  Think again.

I'm actually feeling a little queasy as I write this.  Repeat after me: giving the government power is never a good idea.  The government bought up a crapton of bad debt through TARP.  "Bad debt" is a specific term in accounting, it means a bet you've already lost.  If a debt is labeled a "bad debt" it means you never expect to be repayed.  It's a permanent loss.  Problem was, housing bubble made for a lot of bad debt.  Enough that some banks might not have enough money left over if they stop pretending they'll be paid back.  So the government bailed them out - they bought the bad debt at a ridiculously sweetheart rate - about $0.30/dollar.  That means when Treasury bought a $200,000 bad mortgage from a bank, they paid the bank $60,000.  The usual rate for a collection agency to take a bad debt is $0.10/dollar to $0.15/dollar - so the government overpaid between 300% and 500%.  What did they buy w/ that premium?  They'll tell you stability, and in honesty, that was the primary (albeit misguided) goal.  But now, the government owns your debt.

You know those credit consolidation companies, that advertise how they'll lower your payments and even reduce your principal owed?  This is what they do.  They take your bad debt - the one you're 90 days delinquent on, that the bank is starting to wonder if they'll ever make back - and tell the bank "Look.  This dude isn't paying you back.  Now, you can get back, say 60% of what he owes, or you can get zero.  It's up to you."  The bank takes the gut punch like a man, and you dance around your living room thinking about how great you got over.  Congratulations, you've cheated that poor sucker of a bank out of its money.  Of course, they're not operating at a loss, which means your irresponsibility is baked into their interest rates, so really you cheated some random responsible person out of his money.  But whatever.  You made out, who cares, really?

Well here's the deal.  Why wouldn't the government do exactly the same thing?  And sure enough, that's what their looking to do.  3 months before a tough election.  They're going to give free money to irresponsible borrowers, and you and I are footing the bill, both financially and politically.  Remember that woman who said she was voting Obama because he's going to buy her a house and a car?  That doesn't sound that funny anymore.

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