Is the US too big to fail? it seems to think so
nationmultimedia.com
The US Congress on Wednesday passed a wide-ranging housing rescue plan to help ease the downward spiral in the property market that is weighing heavily on the US economy. The plan offers aid to homeowners facing foreclosure and seeks to support mortgage finance giants Fannie Mae and Freddie Mac. Initially, President George Bush threatened to veto the bill.
After the Senate vote, he is now more inclined to sign it into law for fear that a collapse of the housing and credit market could sink to the US economy into a depression similar to that of the 1930s. Bush is throwing away his free-market beliefs.
Most Republicans are fuming over the housing legislation, which amounts to a handout for irresponsible homeowners and unscrupulous lenders. However, they do not have enough votes to block the bill.
The bailout of the US housing market raises a fundamental question about the US's laissez-faire philosophy. According to the tenets of free enterprise, businesses that make mistakes must go under. It is not the role of taxpayers to shoulder the burden of irresponsible enterprises or managers. After the bailout of Bear Stearns, the Wall Street firm, Treasury Secretary Henry Paulson is now scrambling to put together a package to bail out Fannie and Freddie. The estimated cost of rescuing the two mortgage finance giants ranges from US$25 billion (Bt835 billion) to $100 billion.
Fannie and Freddie account for about half of the $12 trillion US housing market. They have issued some $5 trillion in mortgage-backed securities. Of this, $1.5 trillion is subscribed by foreign institutions such as the central banks of China and Japan. Fortunately, the Thai regulation is still outdated. Otherwise, the Bank of Thailand could have dished out its excess international reserves to subscribe to the mortgage-backed securities of Fannie and Freddie.
The legislation, which passed in the House by 272 votes to 152, aims to provide $3.9 billion dollars to help local governments buy and rehabilitate foreclosed homes. It also permanently boosts the dollar limit for mortgages that can be repurchased by Fannie and Freddie and expands the federal mortgage insurance programme. By doing so, fresh liquidity can be added to the housing market. The bill would also allow the Federal Housing Administration to insure an additional US$300 billion in loans.
It is a bit odd that the bill aims to help homeowners keep their homes. The question is if people can't afford to pay for their homes, why bother? US mortgage lenders have been committing a grave financial sin by offering loans to Americans, who have poor credit and couldn't afford to pay for their homes in the first place. It is an American dream to own a home. But the American dream can't be realised by irregular wage or salary earners with poor credit records. This reckless lending spree went on with the illusion that the prices of the US housing market would climb forever. Moreover, mortgage loans were repackaged as mortgage-backed securities and sold off to investors worldwide. The banks and investment banking firms made a lot of money on these crazy sub-prime loans and securities.
When the US housing bubble burst last year, investors and financiers, as well as US authorities, went running for cover. Still, they mostly played down the crisis, believing that it would be contained. But the crisis is still far from over for the US economy. Loan defaults are now becoming common among those with good credit records. Bank and financial stocks have fallen by almost 70 per cent since last year. You may call it a financial meltdown.
It is estimated the damage in the US housing market could reach $1 trillion, potentially wiping out 75 per cent of the capital of US banks. Now the lenders and financiers are asking for help from taxpayers.
Thailand went through this painful episode before. When the country collapsed in 1997 under the weight of the financial crisis, the US leadership at the time was of the view that Thailand deserved its punishment from the financial markets because it had committed the financial sins of cronyism and nepotism. All the Thai banks must be sold out to foreigners, they said.
Now the US is doing the opposite of what it preached then. It is bailing out US banks that have committed financial sin. And it is resisting selling the US banks and investment banks to foreigners.
The US mess is not over yet. |
