Bill’s Blog

When it comes to teaching your children about money, personal finance specialists will tell you it’s important to give your child enough of an allowance to let them make mistakes they can learn from. It’s important to let them blow their whole allowance on a toy so that they are completely broke until they get their next allowance. This teaches them the importance of budgeting and saving - but only if you don’t bail them out. If you constantly give them more money after they’ve already blown their whole allowance, they learn to make bad decisions with their money and expect you to pick up the tab.

This same thing is happening right now on a national scale. The kids in this scenario are the people who took out mortgages they couldn’t afford and the lenders who made loans to people with bad credit and no documentation.

When you take out a mortgage, you should know that home prices are not always going to rise. You should know that interest rates fluctuate and that if you have an ARM your payments could change quite a bit. Taking out a mortgage you ultimately can’t afford is irresponsible, and if you do that, your home should be foreclosed so that you have an incentive to educate yourself and make better decisions in the future.

When you loan money to someone, you should have some idea of how likely it is the money will be paid back, and the interest rate on the loan should reflect that. You should know that someone who can’t document their income is probably lying about it and can’t really pay the loan. You should know that someone with horrible credit who never paid any of their other debts probably won’t pay back the money you’re lending them either. Loaning hundreds of thousands of dollars to people like this is irresponsible, and if you do that, your loan company should be in danger of going out of business so that other companies have an incentive to be more responsible with their loaning practices.

Unfortunately, we have people like Bill Gross who are calling for a mortgage bailout:

“This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard-working Americans whose recent hours have become ones of frantic desperation,” said Gross, a founder of the fixed-income investment firm PIMCO and a columnist for Fortune.

Then we have people like Jim Cramer quite literally screaming for a financial sector bailout:

“Bernanke needs to open the discount window. That’s how bad things are out there. Bernanke needs to focus on this… Bernanke is being an academic. It is no time to be an academic. It is time to get on the Bear Stearns call, listen… He has no idea how about it is out there. He has no idea. He has no idea. I have talked to the heads of nearly every single one of these firms in the last 72 hours and he has no idea what it’s like out there.

If we bail out a bunch of bad mortgages (and I say “we” because it will be you and I paying for it with our taxes), that only encourages more people to take out bad mortgages because why not, the government will bail them out. If we bail out the financial companies who invested in these loans (and I say “we” because when the Fed floods the market with more cash it reduces the value of the cash you and I have in savings), that only encourages financial companies to act just as carelessly in the future.

Bill Fleckenstein quotes extensively from a Financial Times article by Andy Xie, and I’ll borrow the same quote here:

The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people’s money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy. Nor should central banks stimulate to avoid recession at any cost. Business cycles are not bad. Excesses must be followed with cleansing. . . .

Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this ‘central bank put.’ As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan ‘put’ for good.

At least a few analysts want to see these people bear the consequences of their actions. It’s disturbing, however, that so many of them are advocating some sort of bailout at the expense of average taxpayers. And since heads of financial companies have a lot more political pull than the average taxpayer (and a lot of average taxpayers aren’t even paying much attention to what’s happening), they’ll probably get their way, and the rest of us will pay for it.