Great Depression Online Archive Issue:

Taxpayer Waste Disposal

Great Depression Online
Long Beach, CA
November 17, 2009

Inside This Issue You Will Discover…

*** Fungal Spores Upon a Dying Leper’s Face
*** The Moral Hazard of the FHA
*** Taxpayer Waste Disposal
*** And More

Fungal Spores Upon a Dying Leper’s Face

We look on with wide open eyes and gawk at the veracity of the spectacle.  Where men, in an attempt to deny the workings of the world, built up an elaborate financial system of government sponsored pathology…believing that somehow, someway, if risk is spread thin enough, it miraculously disappears.

Naturally, for a time, they were right.  The delusion appeared to work.  In fact, it worked so well, people came to believe they lived in a world without consequences.  And that with a little more government, perhaps just one more program, the laws of nature would be repealed forever. 

That you can actually eat your cake and then have it too was common knowledge.  Those who suggested otherwise were crackpots and loons.

~~~~~~Don’t Fall Into the Trap~~~~~~

Don’t fall into the trap of group-think. 

Large banks and more recently pension funds have suddenly become infatuated with gold.  They chant the mantras that gold bugs have known for years: gold is a store of value; owning gold is financial insurance; an ounce of gold will always buy a good suit.  The idea is that if the economy continues to weaken and share prices decline, a strategic allocation of the precious metal will hedge and offset some of the losses in the financial sector.

If Stocks Tank, Shouldn’t Gold Soar? 

~~~~~~~~~~~~~~~~~~~~~~~~~

Here at the GDO we want to be indifferent to the financial folly.  We want to view the utter foolishness of it all with expectation and acceptance.  But alas we cannot.

For observing how one man earns his living, and how others attempt to take it from him, has become increasingly intolerable.  Particularly, as the chicanery and coercion out of Washington has proliferated like fungal spores upon a dying leper’s face.

Here’s what we mean…

The Moral Hazard of the FHA

A “moral hazard” is the idea that a person or party shielded from risk will behave differently than if they were fully exposed to the risk.

A person who has automobile theft insurance may be less careful about securing their car because the financial consequence of a stolen car would be endured by the insurance company.

Financial bail-outs, of both lenders and borrowers, by governments, central bankers, or other institutions, produce a moral hazard; they encourage risky lending and risky speculation in the future because borrowers and lenders believe they will not have to carry the full burden of losses.

In the moral hazard of the Federal Housing Administration (FHA), mortgage lenders are more reckless than they would be if their own money were on the line.  Make the loan and collect the interest, is the lenders primary concern.  If the loan goes bad, it doesn’t matter…the loans insured by the FHA.

But the moral hazard doesn’t stop there; instead, it starts.  For the FHA knows the government backs them if they get into trouble.  That’s why, even with the housing meltdown, the FHA still allows a down payment of just 3.5 percent and a credit score of just 620.

Who but a government agency would insure a home loan with such a low down payment to a borrower with such a dubious credit record?

Obviously that question’s rhetorical.  But it makes the point that without the moral hazard of the FHA, people with risky credit would’ve never been lent money to buy houses they couldn’t afford.

Taxpayer Waste Disposal

In what must be just one more sign that all’s not financially well, is the startling fact, recently uncovered by an independent audit, that the FHA’s cash reserves have fallen well below the 2 percent limit required by law for insuring home loans. 

“As of Sept. 30, [FHA] reserves had an estimated value of $3.6 billion,” reported the Washington Post.  “The current total represents 0.53 percent of all outstanding single-family loans insured by the FHA, well below the 2 percent portion set by law.”

In other words, the FHA has just $3.6 billion set aside to insure $685 billion worth of outstanding mortgages.  “For a portfolio that large, Thomas Lawler, an economist and housing consultant, said the current cushion ‘basically rounds to zero.’”

If just a little more than a half a percent of these loans were to go bad, the FHA would be completely wiped out.  What’s more, “should reserves become completely exhausted, the government would be obligated to make good on any claims.” 

Of course, you know what that means.  That means the taxpayer – that’s you – would be called on but again…this time to pick up FHA’s tab.

Such is the consequence of government geniuses layering moral hazard upon moral hazard…where the risk is spread so thin it no longer encumbers the borrower or the lender.  Rather it piles up like millions of tiny cigarette butts on a Southern California beach, and is passed on to the taxpayer to dispose of the waste.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Large banks, pension funds, and gold bugs are become more infatuated with gold the more the economy weakens and stocks decline. But when you look at the facts, does gold really rise when stocks fall?

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