Friday, September 26, 2008

Class Warfare: Who Gets the Bailout?

The rich and the middle class and the poor are not friends; they are enemies. (To the rich, everybody else is the poor, by the way.) The rich do not care about the fate of the poor. Soaking the poor, grinding the poor down into greater poverty, is the time-honored method of getting rich. But there are consequences to such indifferent venality, as the aristocrats guillotined during the French Revolution may have realized.

The recent real estate bubble was a direct consequence of investors fleeing the uncertain stock market after 9/11 for a safer venue. Land always exists, after all. But the sudden fashion for investing in real estate and the availability of this new investment money created pressure to use the money creatively. And that embroiled too many ordinary citizens in what amounted to a giant Ponzi scheme. Yes, as with any scam, the mark has to agree knowingly to some kind of cheat. And people did, signing up for mortgage payments they knew they could not afford. The scam they thought they were running was to dip into increasing equity in their new homes as the market continued to rise crazily. Meanwhile, the biggest investment companies were selling each other a different scam, consisting of complicated bets on whether this would happen. Swaps of risks, at high earnings. When the bubble burst, everybody had to lose.

That of course is the reason that people are saying no bailout at the top of the financial pyramid will work unless there is a bailout at the bottom. If foreclosures continue, the value of the complex securities bolstering the big financials will continue to drop because no one knows what they are worth in today’s market. If foreclosures stop, the market will stabilize.

My own personal suggestion is that every mortgage in or nearing foreclosure should be renegotiated to a 50- or 60-year term. Anything to get the monthly bite down to what is affordable. It’s not as if the length of a mortgage really matters, since 80% of people sell their houses long before they pay off their mortgages. (The total dollar indebtedness hardly matters, either, since in a stable housing market, prices normally rise. Thus even a house that has lost 25% of its value in today’s market will eventually regain that value.)

What is important is that we provide a way for ordinary people to stay in their houses, living from paycheck to paycheck as usual. The middle class must be able to keep up with their payments. All their payments, including home equity loans and credit card bills. The US economy depends on the pressured middle class to keep paying and paying, at high rates of interest. It’s not an ideal economy, but as long as people don’t go too far into debt, it works.

What the housing catastrophe has proved is just how devastating a significant middle class loss can be to the highest levels of the economy. Increasingly in the past several decades, anti-regulatory laws have enabled the rich to make amazing financial gains at the expense of the middle class. The rich have brushed off concerns about the financial burdens of the poor (remember, that’s how they think of the middle class). Now the rich are hurting because their own investments are tied up in the companies that are foundering. And these companies are foundering directly because of the foreclosure crisis affecting our middle class. Ironic, isn’t it? Maybe the rich are not so immune from consequences after all. And maybe we don’t have to guillotine them to punish them for their vicious greed. They can take the fall that the rest of us are taking.

So count me as anti-bailout unless the rest of us get a bailout, too.

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