The end of Uncle Sugar ...

The government can’t bail out everyone and everything.

The days when Uncle Sam picks up the tab for bad decisions, acts of God, and acts of terror must end. This applies to everyone – states, Federal agencies, corporations and individuals. 

We can’t afford it anymore. It’s also cultivated a dangerous mindset that nobody needs to take responsibility for their own actions. It encourages stupidity at the personal and corporate level. Why bother to protect yourself when the Feds will bail you out?   

It rewards those who ignore the most fundamental rule of life: shit happens.

Because shit happens, rational people and companies buy insurance – they are betting that shit might happen; insurance companies are betting that the risk of shit happening to the insured is acceptable at a certain cost.  It’s a purely logical business proposition. 

Generally, insurance companies assess their risk based on past experience and future probability. They use history, math, and science in their calculations.

When the government gets involved in insuring things, it uses none of those things. The only thing that matters is politics, and optics. That’s why the government routinely takes enormous hits – at taxpayer expense – insuring things it shouldn’t, and at laughably low rates.  

Whenever, by pure chance, it manages to avoid a beating on insuring something, and even makes a profit, Congress moves swiftly to make certain that doesn’t happen again.  Recently, when by pure dumb luck, the government started making a profit on student loans the outrage in Congress was huge. Democrats in particular made it seem like the government was harvesting organs from student borrowers, rather than just getting a short-term bump from interest rates.      

Politicians always want to be the good-guy, the kindly grandparents, and the person who can kiss the boo-boo and make it go away. They relish any opportunity to take away the hurt and make the world all right again.  And, of course, take credit for it. 

If Congress had an anthem it would be The Candy Man as sung by Sammy Davis, Jr. 

Politicians love to insure stuff, or at least subsidize insurance for the politically connected. Farm-state politicians push price supports – a form of insurance – to protect farmers from basic supply and demand. Green-energy companies get their loans guaranteed – a form of insurance. Homebuyers have FHA mortgages guaranteed – a form of insurance.  Bank depositors have their savings guaranteed by the FDIC – insurance. People who live in flood zones have long relied on subsidized insurance.     

The government, which means taxpayers, usually loses on insuring stuff because, unlike private insurers, politicians are loathe to cut their losses and move on.  Instead, they’ll keep shoveling our money down the rat hole and pretend nothing’s wrong while hoping things will fix themselves. When private insurers are defrauded, they’ll refuse to pay out on bad claims; when something government insures goes bust, even when there’s criminal misconduct involved, politicians usually just huff and puff and promise it won’t happen again.

A perfect example is the savings and loan fiasco. The FSLIC provided government-guaranteed insurance on deposits held by S&Ls.  In the late 1980s over 740 S&Ls failed, mainly because of bad real-estate investments, fraudulent mortgage-lending practices, and cooking the books to hide losses. The collapse of one S&L alone – Lincoln Savings & Loan headed by Charles Keating – cost the government $3 billion.  By the time the smoke cleared, it’s estimated that taxpayers got hit for over $120 billion to bail out the S&L industry.

What did Congress do?  They rolled the FSLIC into the FDIC and called it a day.

Oh yes, five Senators had to face the Senate Ethics Committee.  Two years earlier they’d intervened on Keating’s behalf to stop a Federal Home Loan Bank Board investigation into his shady practices, in exchange for campaign money.  Remember, Keating’s the same guy who ultimately cost U.S. taxpayers about $3 billion. 

Three Senators got a slap on the wrist; two others were found to have used “bad judgment.” 

The one Republican in the so-called Keating Five, and one of the “bad judgment” guys, was John McCain (R-AZ).  Later, in a stunning display of hypocrisy, he co-sponsored the McCain-Feingold Bill on campaign finance reform.  Since then he’s been an outspoken critic of the influence of special-interest money on government. He should know. 

Did our government learn its lesson from the S&L crisis?  What do you think? 

When the markets collapsed in 2008, because of – let’s see – bad investments, fraudulent mortgage lending practices, and cooking the books to hide losses, it was like the S&L crisis all over again, only many times worse. 

How did this happen again? 

When the government assumes all or part of a risk, this opens the door for – and actually encourages – people and companies to make stupid decisions they wouldn’t otherwise make.  

Politicians in both parties in the 1990s wanted to boost home ownership among low-income people, who typically have with poor credit histories. To do this, they required lenders to make more mortgages available to people who wouldn’t ordinarily qualify, with the promise that the government would back these “subprime” mortgages. This encouraged lenders to lower their standards for approving mortgages.  And the floodgates opened. 

Government-subsidized mortgage backers like Fannie Mae and Freddie Mac were then persuaded to buy up, bundle, and remarket these shakier investments to other banks and investment firms, who snapped these up. Without the government backing these, indirectly, nobody would have touched these.   

Of course charlatans, speculators, and deadbeats jumped in. The housing market took off with all this new money on the table. Prices soared. Speculators were buying and flipping properties in weeks if not days using bank money instead of their own.  So they had little skin in the game.   

By 2008 Fannie Mae and Freddie Mac owned or guaranteed over $5 trillion in mortgage debt.  Many of those mortgages were bad.  They’d been given to people who didn’t really qualify under normal circumstances.  Many couldn’t afford to pay today’s monthly payments, much less future payments when their bargain-basement teaser rates might go up.

Everybody was counting on housing prices to continue to rise.  Instead, the market stalled and prices started to fall.   A lot of people now owed more on their mortgages than their house was worth.  So people with little skin in the game walked away from their mortgages.  The glut of houses in foreclosure forced prices down further, spurring more “jingle mail” as it’s known. 

Via Fannie Mae, Freddie Mac, and the FHA, Uncle Sam was left holding a lot of bad paper. Maybe as much as $800 billion or more in tax dollars will be spent on this bad bet.     

Another stellar investment with your tax dollars.  And for what?  To help mortgage crooks like Countrywide make millions?  To help speculators?  To help real-estate agents?    

Our government has also rolled the dice on green-energy projects – and lost big.  It’s now exposed to over a trillion dollars ($1,000,000,000,000 ) and rising of student loan debt. 

How is it dealing with these? 

Well it’s continuing to hand out green-energy loan guarantees, lauding a track record of $30 billion in loan guarantees with only about a 2% default rate, so far.  (For reference, 2% of $30 billion is still a $600,000,000 loss, and it’s still early.)

On student loans, the Obama folks want to increase access to student loans for even more people.  There’s already a program they pushed to forgive all or part of a student’s outstanding loan balance if he or she – wait for it – goes to work for the government or a politically favored non-profit organization.  Just what we all want, right? 

I guess McDonalds and Wendy’s are all full up on people with Masters or Ph.D. credentials in Obscure French Poets of the 15^th Century.  So why not encourage them to go into government?   

The bigger question is why is our government even involved in these things? And when it foolishly decides to insure something, why doesn’t it at least use the same risk-assessment criteria that private insurers use and charge appropriate rates in return? 

The answer, as always, is politics. Having the government as your backup calms private insurers.  Subsidizing what should be much higher rates makes businesses and consumers take risks they probably wouldn’t otherwise. Neither subsidized rates nor loan guarantees make for rational decisions.        

Politics distorts reality. The belief that the government can afford to pay for anything and everything that occurs when shit happens is fed by politics. 

This also encourages stupidity.   

There’s no rational reason in the world why our government underwrites flood insurance. Or provides financial relief for people who live in the paths of hurricanes or tornadoes.  This may seem like the “humane” thing to do but it only encourages people to live where and in structures common sense tells them they shouldn’t.  Absent government-subsidized insurance, or the promise that government will bail them out when – not if – disaster strikes, maybe they wouldn’t.  Or they’d at least take steps to protect themselves and their property better.   

It’s your right to live on a flood plain, on a barrier island, below sea level, or in the path of hurricanes and tornados. But it’s not our collective responsibility to pay for your decision should shit happen to you – in what is only a matter of time – because you’ve chosen to live there. If the real insurance rates without government subsidies to offset that risk are too high for you, then perhaps you should move to a safer place. 

Commonsense?  Sure.  But so is not borrowing $100,000 to pursue a whim that has absolutely no market value outside of academia.  So is not funding a blue-sky green energy venture that can’t attract any outside investors without a loan guarantee.  So is not guaranteeing loans for houses or whatever that private lenders are not willing to underwrite on their own. 

We have to stop assuming risks that the free market wisely refuses to cover.  We need to stop subsidizing stupidity as well. 

Congress needs change how it spends our money.  Or we need to change Congress.