The End Result of the Housing Crisis: Give Wall Street All the Money it Wants?

In a move that Naomi Klein (see: The Shock Doctrine) would probably appreciate, the economic crisis that has been written about here and many other places over the past couple of years has resulted in what is about to be the largest scale change of the financial landscape in America since the Great Depression - and is potentially moving in the ultimate opposite direction than the reforms of the New Deal moved.

Scooped by the excellent financial blog, Calculated Risk, it would appear (as far as the government is concerned) that the end result of the financial crisis we are in is the creation of a $700 billion superfund that is designed to do... well... whatever the treasury secretary, Henry Paulson, wants to do with it. The thin air that this money is supposed to appear out of will come either from the taxpayer now, the taxpayer later, borrowing from the Chinese, or just printing the money ourselves. Its supposed object is to snatch up all the bad debt from all the financial institutions so those companies can have clean balance sheets and move on. Tremendous stock market rallies occurred on Friday as the thought that the government was going to step in caused fears to be alleviated on Wall Street.

Follow up:

The shaft that this bill will give to the taxpayer is evident from the order Mr. & Mrs. Average American come in on the bill itself:

In exercising the authorities granted in this Act, the Secretary shall take into consideration means for--

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer.

Congrats working people, you're number two!

The National Debt will also be expanded under this bill to eleven trillion, three-hundred fifteen billion dollars: $11,315,000,000,000. This also counts absolutely zero dollars of the liability the government took on by keeping Fannie Mae and Freddie Mac from falling under - so the grand grand total is somewhere north of fifteen trillion dollars, but really who's counting?

Things not included in this bill:
1) Regulation to keep this from happening again
2) Any way to stop the root cause: the housing market collapse

In the event that Washington doesn't notice (and with their response up until this point one can argue they never noticed), the housing market crisis that triggered this collapse is still ongoing. The price of homes are still falling. The sale of homes are still sluggish. It's still rather difficult to get a loan for anything out there. There is still a massive oversupply. Job losses are still rising. People who are getting jobs are often times finding jobs that paid less than their previous, which means they can't support their current house or can't obtain a new house that they want. The root causes are not addressed by this bill at all.

The government can buy up all the bad debt it wants to, it still isn't going to change the scenes around this country of vacant houses, vacant lots, vacant sub divisions that never got anywhere near as full as their promise when ground was first broke. There is literally no one around to buy these properties, and unless we all wake up from this bad dream and land back in the 90's, there won't be anyone coming around to buy anything for the foreseeable future.

Oh but, no one could have imagined...

The rapidly growing trade in derivatives poses a "mega-catastrophic risk" for the economy and most shares are still "too expensive", legendary investor Warren Buffett has warned.

The world's second-richest man made the comments in his famous and plain-spoken "annual letter to shareholders", excerpts of which have been published by Fortune magazine.

The derivatives market has exploded in recent years, with investment banks selling billions of dollars worth of these investments to clients as a way to off-load or manage market risk.

But Mr Buffett argues that such highly complex financial instruments are time bombs and "financial weapons of mass destruction" that could harm not only their buyers and sellers, but the whole economic system.

That was from March 4, 2003, back when the collective conscious of America was diverted and focused on our soon to be Glorious Victory in Iraq. That didn't stop Mr. Buffett from making with the truth speak though:

Derivatives are financial instruments that allow investors to speculate on the future price of, for example, commodities or shares - without buying the underlying investment.

Derivates like futures, options and swaps were developed to allow investors hedge risks in financial markets - in effect buy insurance against market movements -, but have quickly become a means of investment in their own right.

Outstanding derivatives contracts - excluding those traded on exchanges such as the International Petroleum Exchange - are worth close to $85 trillion, according to the International Swaps and Derivatives Association.

Some derivatives contracts, Mr Buffett says, appear to have been devised by "madmen".

He warns that derivatives can push companies onto a "spiral that can lead to a corporate meltdown", like the demise of the notorious hedge fund Long-Term Capital Management in 1998.

Countrywide Financial.
Bear Sterns.
Fannie Mae.
Freddie Mac.
Lehman Brothers.
Merrill Lynch.
AIG.

On this date in 2007, all of these companies existed. Now they are either shadows of their former selves, have been de-facto nationalized by the United States government, or have been forced to "merge" in hastily-arranged shotgun marriages over weekends in progressively more and more desperate attempts to stabilize the markets, or are just straight up bankrupt and gone.

Back to the hear and now, and the shock.

If passed, this bill will allow for a nearly unlimited flow of money to be pumped out of the taxpayer ($700bn is the number, but that only counts assets purchased at one time - assets can be sold, profit pocketed, and new assets bought) and into whomever on Wall Street that Treasury Secretary Paulson believes it should be. His moves are to be conducted with absolutely no oversight of any kind whatsoever - not Congressional, not judicial, all in the name of saving the economy. In the shock of the economic meltdown, reforms are being rammed down the collective throats of America leaving them none the wiser, and staring down at a huge, huge tax bill in the future.

The sad thing is that there really aren't many options left from this point. The economic crisis is like a house of cards in mid fall: there will still be some other companies to go. In the absence of any sort of action, it appeared that the next week would greet us with the failure of Washington Mutual, and rumblings getting louder about companies like Goldman Sachs. Even stall worths like General Electric - who also have significant exposure to this mess - would eventually be left pondering their profitable future in the face of a gathering and unstoppable storm.

What we need right now are rational voices to direct our future economic policy, not new doctrines designed to make the Treasury Secretary suddenly the guy with access to the Monopoly bank. Unfortunately as we have learned with disaster after disaster this decade in this country - rational voices are nowhere to be found at any point in or near this or any other crisis.

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Related:
I went wandering through one of the many unfinished housing developments in this part of town (Macomb County, Michigan). You find developments with all the excess and greed of the early part of this decade: streets too narrow, houses too close, the land used in the most efficient possible way to build the most homes as possible to maximize profit as much as possible. I find it ironic that one of the first things done in the development was to remove all the topsoil, leaving clay. Now years later, the landscape looks closer to some place bordering a desert rather than land found in the Great Lakes. If I bought one of these homes, I don't know what would annoy me more - living in the middle of a field, not having anywhere to park, or being surrounded by dozens of acres of weeds.

( 25 pictures in all )