24 July 2008

Crony Capitalism and the Curiously Named House Housing Bill

I think that I may have to side with Bush on this one. It does not make sense to rescue the mortgage industry with legislation that will cost American taxpayers twice. To the extent that the new housing bill actually props up house prices, it'll cost Americans by driving up housing costs along with the price of fuel and food and education. And given that this bill will cost billions, taxpayers will be charged to prop up these prices. Bush was right to threaten to veto the House Housing Bill.

Legislation thus far has seemed to do more to help the financial industry (read, CEOs) then the average person. The finance industry is in trouble because Americans are finally responding rationally to stagnating incomes by cutting back on debt obligations. The finance industry first benefited from growing incomes (up to about 1960) and then from growing incomes coupled with growing debt (from about 1965 to 2000) and then, for most of the last decade, a growth in debt even as incomes stagnated. But the ratio of financial obligations to disposable income has finally come down. Households finally adjusted to lower incomes by accepting less debt. This reversal in the growth of debt means that the financial industry suddenly faces the prospect of stagnating growth.



Not only have median incomes fallen, but households have reduced their debt obligations, as can be seen in this graph of financial obligations (basically the ratio of debt payments to disposable income).



This is not really a housing crisis. Lower prices don't change mortgage payments for people who already own and do make it easier for new people to buy (even those who sell for less can, in turn, buy for less). This is a financial industry crisis. And the financial industry was the largest contributor to both Bush and Kerry's campaigns in 2004. (In the last decade, Freddie Mac and Fannie Mae spent $200 million lobbying government.) After paying so much, they expect returns.

It is worth clarifying who gets those returns. It is not stakeholders like consumers, employees, shareholders, or taxpayers. The returns flow to corporate executives who feel entitled to obscene salaries even while letting down ALL these stockholders.

Freddie Mac's CEO got nearly $20 million last year for his McLeadership. By contrast, Fannie Mae's CEO was penalized for reducing the value of his company by half: his pay was reduced in 2007 by 15% to a mere $12.2 million.

If legislators actually cared about housing, they’d address homelessness. Instead, this seems like another instance of crony capitalism masquerading as pro-business policy. No industry has benefited more from the "privatize profits and share losses with taxpayers" philosophy of crony-capitalism than the financial industry.

4 comments:

Jennifer H said...

As much as it pains me to agree with Bush on anything...let's just say that I agree with you agreeing with him. The question to ask, as you did, who does it benefit?

Housing prices needed a correction, even if it's painful. It seems to me that if that adjustment doesn't happen now, it will be even more painful later. If I were trying to sell a house right now, it would be harder to say that, I suppose. But living within our means needs to become respectable thing to do.

Ron Davison said...

Jennifer,
I like the way you so neatly avoided actually agreeing with George. And that housing price thing, well, just think of our children. If house prices drop a bit - or even stop rising for a while - they have a shot at owning some day.

Lifehiker said...

One thing we can definitely agree on is that these CEO's are being paid obscene amounts. They are merely employees, not GODS.

Another thing is that we got into this housing and lending crisis because neither the administration, the congress or the Federal Reserve throttled the real estate, mortage bankers, and investment bankers who went wild with sub-prime loans. Guess who owns our goverment? If you guessed the above, you get a gold star.

"Crony-capitalism" ( I love the term ). I agree. Maybe don't shut them down, but find a way to punish these psuedo-CEO's for busting their companies!

ThomasLB said...

What I like about the bill is that it doesn't bail out the industry directly, it merely gives GWB the authority to bail out the industry if he decides it is necessary.

That sounds vaguely familiar.