Unless you’ve been living under a rock and given how bad the housing market is, this may be a reality, the big news making the rounds this week is the housing bailout plan otherwise know as the Housing and Economic Recovery Act of 2008. We can talk about the B-list theatrics with Mozilo shedding a tear in the otherwise pathetic attempt to send off ugly daughter Countrywide in style via a shotgun wedding to Bank of America but you have to hand it to Mozilo, he knew how to play the political game well and realized Americans would eat up anything served up to them with a ribbon and perfume.  He also ensured a few high profile politicians had their fingerprints on Countrywide.  Collateral damage.

But make no mistake about the bigger issue. This bailout should it go through would be the biggest bailout in the history of the human world. That is how big this thing is. Given that Bank of America had its hand on writing or at least influencing part of the legislation, I’m sure we all know where this is heading. And what a coincidence that they are buying Countrywide trying to close before the 4^th of July while this legislation is being crammed down before the summer recess. What are the odds!!! Yet Americans are more worried about offshore drilling and saving 20 cents five years from now as opposed to seeing rampant inflation tax the hell out of the middle class family budget.

These issues are maddening and thankfully today I was able to land an interview with the uber-Senator Mr. Government Genius. These things can get complicated so we’ll ask him about this new government bailout.

Interview Conducted June 26, 2008:

Dr. HB: Hi Senator Government Genius. Thank you for agreeing to this interview.

GG: You’re welcome. Glad to be here in sunny California representing my sunny constituents! Woo Woo!

Dr. HB: Umm, ok. Let us get started and talk about this much-discussed housing bailout bill.

GG: I wouldn’t call it a “bailout.”
Dr. HB: What would you call it?

GG: I’d like to call it the “Housing and Economic Recovery Act of 2008”

Dr. HB: Isn’t housing what got us in this mess in the first place?

GG: Yes. But we didn’t build right the first time around. Now, we’ll build but instead of using other people’s money (OPM) we’re going to use the American tax payers’ money. Americans like it when we use the tax payers’ money.

Dr. HB: But won’t they realize that they are the ones who will ultimately pay for the financial irresponsibility and stupidity of others?

GG: Not necessarily. We’ll make it seem like we are really punishing lenders like forcing them to write-down 10 percent of their loan. Once they agree to this, we’ll move people from unfriendly evil mortgages into happy smiling government loans.
Dr. HB: Aren’t you effectively putting a bottom for, oh, I don’t know, lenders? Places like California have seen prices drop 30 percent in one year. Given current trends, it is very likely prices will fall another 20 to 30 percent. Doesn’t this essentially ensure that the government will purchase loans with embedded declines?

GG: Hard questions! Not really. See, money grows on trees or as I like to call it, in the nursery of the Federal Reserve. We have these really nifty printing machines and incredibly, the world allows us to print more money without producing anything to back it up. Imagine using your Epson printer at home and going into Adobe Photoshop and printing hundred dollar bills all night. Don’t do that because if you do that, it is illegal. When we do it, it is called stimulating the economy. See the difference? So if homes do decline after we buy them, we can just print more money and all will be fine.

Dr. HB: Wouldn’t that cause rampant inflation?

GG: Only on fuel, groceries, education, healthcare, and travel. You know, things Americans don’t need. But prices on homes will stabilize and go up and this is good since more people will be able to tap their God given right of home equity and go forth and consume again.

Dr. HB: Interesting. Do you believe in capitalism?

GG: Abso-freaking-lutely. I bleed Adam Smith. See, take a look…I’ve got Wealth of Nations tattooed on my back.

Dr. HB: Yeah, I really don’t need to see that. So you believe in capitalism. Now wouldn’t the government intervening and putting a bottom to home prices correcting go against the idea of a free market environment?

GG: Ummmm…I’m not sure I follow.

Dr. HB: Well it would seem somewhat situational to come in now that prices are falling using tax payers’ money to protect those that took risks during the housing bubble. Why didn’t the government step in and put a ceiling on how much prices could go up during the boom? Wouldn’t the same hold true on this as well?

GG: Capitalism is about always ensuring profits. I think Adam Smith said that in chapter 5.

Dr. HB: He didn’t say that. So basically what is occurring is a form of corporate welfare where lenders and Wall Street firms that took excessive risk now face a bottom which will be created with money from tax payers…many who did not gamble irresponsibly with their money. If it weren’t for this artificial bottom wouldn’t these firms simply collapse on their house of cards?

GG: Yes. And a world with no Bear Stearns is a very sad one indeed. Can you imagine waking up and having a world with no Countrywide, Lehman Brothers, Merrill Lynch, or Hummers? What a sad world that would be. I’m getting misty eyed just thinking about it. I think that is why Mozilo got a little choked up this week.

Dr. HB: We may have a world with no Hummers if gas prices stay this high. So you are telling me right now that essentially the government is ensuring selectively hand picked firms that would collapse without public intervention, is that correct? Now I know many of your constituents are thinking, “why not let a business that is poorly managed and is leveraged to the hilt collapse. In fact, the reason we are talking about this bill is because of these companies and lenders.” What would you have to tell them?

GG: Hello, we’re from the Government and we’re here to help. And this isn’t public support. This is support from the Federal Reserve. They have a big savings account, imagine your WaMu account on steroids. And this account, they can exchange one thing for another. Sort of like Columbus trading with folks back in the heyday in South America. It is a fair trade. You give us explosive evil mortgages and we float you some U.S. Treasuries.

Dr. HB: I’m not sure the public views that as a fair trade. Now, in this bill you also have an $8,000 tax credit for first-time home buyers. Economics would teach us, that giving tax credits to a sector will increase demand for it. It also teaches us that by giving a tax credit (aka less tax revenue) we will be increasing our massive deficits. How would you explain the logic of the tax credit?

GG: Well you see, we really want people to buy homes. I’m not sure why people aren’t buying more homes. I just bought 2 homes last month and it is fantastic! So with this tax credit we are basically saying to anyone sitting on the fence, “hey, come jump in the pool! The water is just dandy! And if things go boom we’ll just give you a government loan and all will be fine.” This will help us get more potential home buyers. And about that deficit, we’ll just figure out where to get that money later. Maybe we’ll exchange some old furniture in the White House over at the Federal Reserve.

Dr. HB: I wouldn’t be surprised if they accepted that. Another major contention in the bill is the raising of FHA loan limits. It looks like you guys are trying to raise the limits by 150 percent to $625,000. Now the median priced home in the United States is currently around $200,000. Why is there a need to raise the limit so high?

GG: This is where it gets complicated folks so listen up! Are you listening? Ok. Basically, people in high priced areas like California screwed up three times as much as folks that screwed up in states like Georgia, Ohio, Pennsylvania, and all those other states. For example, someone that bought a home in Ohio for $110,000 with a funky loan now finds their home only worth $100,000. If the lender wanted to move this loan into a FHA product, they’ll eat $20,000 and we’ll rework the loan given the new guidelines. But say you are a sunny Californian! You decided to buy a Real Home of Genius for let us say, $1,000,000. Now, your place is worth only $700,000. The lender wants to unload this turd, uh, I mean deflated happy asset into a FHA loan. The borrower now has a loan at roughly $625,000 and everyone is happy! That is why the cap is being raised.

Dr. HB: But isn’t that selectively helping a handful of states?

GG: Yes. But we all need to take one for the team! Come on nation! Let us take one for California!

Dr. HB: For the past few months, California, Arizona, Florida, and Nevada have accounted for 50 percent of all distressed properties. I doubt the other 40 states with moderately priced homes would like this.

GG: We’ll just tell them that if they don’t, their pensions are at stake and scare the crap out of them. That way, we sink together.

Dr. HB: Given that this bill is being touted at $300 billion, how are we going to finance this bill?

GG: Like I said, if we need to print money we will. Look at it this way. The United States consumes about 20 million barrels of oil a day. At $137 a barrel, that is $2,740,000,000. So with that said, you can pretend that this housing rescue plan is the equivalent of 109 days of oil or a couple of weeks before the general election.

Dr. HB: Nice perspective. Well I think that’s all the questions I have for you Senator. Enjoy your summer recess. I think most folks will be working trying to maintain a middle class lifestyle.

GG: No problemo. Hey folks, make sure you go out there and do your country a favor by buying a Real Home of Genius. It’s the American thing to do.

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