August 20, 2007
Grapes of Wrath Return (Brent Budowsky)
Here is the problem with the Federal Reserve bailout of banks, rather than providing support to homeowners, citizens or the economy as a whole:
Check out the New York Times Aug. 20 story about how those who had their homes foreclosed on by banks often get huge tax bills from the IRS, while the banks buy the home back, at times for $1.
Understand that contrary to much of the snide, condescending coverage in some of the media, many who are foreclosed upon had good-paying jobs that were cut back, laid off, or outsourced, and others had good-paying jobs but suffered major health problems, with ripoff costs imposed by an unjust healthcare system.
In the real world, here is how it can work:
A person takes out a $100,000 mortgage and has a $65,000 salaried job. That person gets his or her hours cut back, or wealthy executives downsize the company while they keep their large salaries and stock options, or ther job is lost by outsourcing to a country that pays slave wages with no benefits. Or the person suffers a health problem and incurs huge costs, which benefit wealthy healthcare companies, while consumers fight wealthy insurance companies and of course well-paid doctors.
Assume that person had made five payments before the crisis that was beyond their control. When they are foreclosed on by the bank, they have lost all of their payments, gone forever, lost their home, forever, and then could be hit with a $30,000 IRS bill for the honor. The Fed's lowering of the discount rate last week did little to nothing for these people.
The bank then gets the foreclosed house, and can often buy the home back for virtually nothing if there are no bidders, and in the medium to long term will be able to sell the house for a slight loss, or a minor profit, or a huge profit if it has the capacity to wait. The Fed's lowering of the discount rate helps these companies.
I predict that very few banks will use last week's discount rate to help average folks. They will either use it to finance mortgages of very high-income homebuyers purchasing top-of-the-line homes at a discount in the current market, or they will use it to buy time, until they finally sell the foreclosed home at a profit.
In effect John and Jane Doe get screwed at each step along the way, from outsourced jobs, eliminated jobs, cost-cut jobs, costs from the ripoff medical system, and foreclosure — where they lose whatever payments they made as well as their homes, and then get a huge tax hit.
Meanwhile, the prime beneficiaries of the Fed action are those who did the foreclosing and the banks, hedge funds and private equity funds who maneuver these assets back and forth between themselves, with fleets of lawyers and accountants helping them minimize costs and maximize ultimate profits with bridge money from the Federal Reserve (ultimately, American people's money).
The Fed should have lowered the federal funds rate. Then the prime rate should be lowered, which would help all Americans and strengthen the national economy, stabilizing consumer finance and the housing market in the medium and long term.
It is true that credit has been overextended in some cases and in some cases foreclosure was inevitable. However, what the media fails to report is the very large number of cases in which hard-working, law-abiding, honorable Americans were screwed in their jobs, screwed in their healthcare, then screwed by those who foreclosed rather than giving them more time, then screwed by the IRS, then screwed by the Fed that takes the money of the American people to help those who did wrong, without helping those who deserve more time.
It is time for a freeze on foreclosures for this group, and time to establish guarantees that these banks, hedge funds and private equity funds agree to equitable treatment for average Americans as a condition for getting benefits from government policies.
Many of these hedge funds and private equity funds are untaxed. How about taxing them a little, instead of taxing foreclosed-upon Americans? How about ending the new "Grapes of Wrath"?
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Brent: It's amazing how someone like you can complain about big government while calling for more government intervention. Well, Leona Helmsley passed away. That's one less rich person for you to worry about.
Comment by Robert Rosencrans — August 20, 2007 @ 12:40 pm
So let me see: it is the right of every person to have a job for life, and with no interruptions of any kind? It is the right of every person below a certain level of income to buy a property with absolutely no reserves and be totally isolated from the consequences of any adverse developments?
I can't believe that in this day and age these arguments can be made with a straight face (I think). The vicious nature of populism is that the argument of "I want to be good to you, the poor and suffering people, I will find a way to make all your problems go away" is very appealing in time of any turmoil. Just look at history and see where that argument has taken those who believed it. These Siren songs eventually lead to death, destruction, and chaos, not the promised land.
Comment by Igor R. — August 20, 2007 @ 12:58 pm
Brent,
How many middle-class families that were ABOUT to lose their home did you go in and "save the day"?
thought so
WE ARE NOT A SOCIALIST NANNY STATE!!
Comment by Jon Pemberton — August 20, 2007 @ 1:06 pm
Of course not Jon. We're a conservative Nanny State. Thus tax dollars to bail out the rich. Glad you were able to see that as well.
Comment by mitch cumstein — August 20, 2007 @ 1:52 pm
While I agree with the critics that banks have to be protected, people must be educated to realize that banks are many times predators. If you don't need credit, don't take it.
It is not your responsibility to go into debt, and it is not your responsibility to provide bankers with a good living.
I personally hope the appetite for credit tanks. That will make the average guy richer and the bankers poorer. No fed action can help the rich if people would quit applying for loans.
Comment by Gary Anderson — August 20, 2007 @ 2:11 pm
No Jon… I don't know where you've been the last 25 years. We are a socialist state. We have socialism for the wealthy and free market rapacious capitalism for those of lesser means.
Igor… I bet you're all over property rights for your class.
Bobby… I bet you're quite happy when your investments are bailed out by big government. You just can't stand the thought the lower classes having their livelihoods or their savings protected.
It's so refreshing to hear the same old Libertarian BS which is essentially, "I've got mine; screw you", cranked out in comments such as yours ad nauseum…
I bet all of you where born on third base and think that you've hit a home run.
Comment by Jim in Chicago — August 20, 2007 @ 2:15 pm
Some of you alleged conservatives and free
market Republicans crack me up. What the
Fed has done so far, the way they did it,
is a bailout of those who made bad business
decisions on the bank, hedge fund and private
equity sides. You are for socialism for the
banks, that is who is getting the socialist
government welfare. What a bunch of hypocrites
you are! You speak with scorn about average
Americans yet you support taxpayer financed
bailouts for wealthy individuals and firms.
Give me a break, guys. If you guys are so
enthusiastic about the private sector, how
about bloated salaries in these companies,
while they lay off average workers? How
about insider boards voting insider managers
bloated stock options where they essentially
trade options they grant each other with
their own insider information, where individual
shareholders and employees get the shaft?
You guys have the mentality of the communist
era companies, where insiders get sweetheart
deals and state organized bailouts! You are
not capitalists, you are socialists in drag,
you just want socialism for private firms and
the wealthy and capitalism for everyone else!
How about the accounting scandals that have
proliferated in public companies like rabbits
in heat? You agree with me, that if a guy who
robs an ATM machine should go to jail, a guy
who robs a company and shareholders through
accounting scandals should also go to jail?
Why do I suspect you favor pardons for them,
too?
If government is going to do something, and
it should, it should help the national economy,
and honest working people, not insiders and
special interests and not banks who either
make bad decisions, or engage in unethical
conduct.
Bailing out banks and hedge funds and private
equity firms that often pay no taxes, for their
bad business decisions, is your cup of tea.
Your model is not Adam Smith, it is Karl Marx,
you just want the centralized state to bailout
private companies and upper incomes at the
expense of hard working Americans and average
taxpayers. Cant wait to debate that one in
2008.
Comment by Brent Budowsky — August 20, 2007 @ 2:38 pm
"WE ARE NOT A SOCIALIST NANNY STATE!!"
No, we aren't, and never have been. You, OTOH, are a selfish, heartless prig who can't seem to come to grips with the fact there are indeed people caught in an unjust predicament.
Compassion is not weakness, greed is not strength, and without a thriving middle class we will perish.
Comment by wwz — August 20, 2007 @ 2:46 pm
Corporate socialism at it's finest….
Comment by Rich M — August 20, 2007 @ 2:48 pm
Jim,
I totally agree with you. They don't mind their "investments" being bailed out by the government, but don't let the government help out the poor. No sir! they deserve what they get. I bet these same people posting are the same ones claiming to be "Christians". Makes you want to puke!!!
Comment by ben — August 20, 2007 @ 2:49 pm
Interesting commentary, but there is one more VERY important fact that Brent and all of you have overlooked.
80 -90% of these loans are insured by the Feds (ie: you the taxpayer),so the banks are already idemnified and won't loose) nope it's you the taxpayer who will pay both for the rich banks and the poor homeloser. This is worse than socialism in the long run.
A better solution here would be to reverse the draconian bankruptcy law filed to protect those poor banks getting taken by the very people they have qualified to loan the money to. (If you and I make bad business choices we just loose the money we don't get to tell the Feds to underwrite our stupidity, but for some reason banks do?)
Thus the homeloser would remain a homeowner- be allowed to lengthen the term over which they pay off the loan and the taxpayers wouldn't get taken by the proverbial banks.
Call you vacationing legislators, tell them to get their lazy and ineffective tails back to DC long enough to save the economy and the taxpayers from this disaster.
Comment by Katharine — August 20, 2007 @ 3:36 pm
Companies don't pay taxes anyway Brent, so what's your point?
Comment by Robert Rosencrans — August 20, 2007 @ 3:48 pm
Igor: Well said. Brent is so inconsistent it is hard to answer with any clarity…
Comment by Rich — August 20, 2007 @ 4:32 pm
Brent, come on, you're putting words in peoples' mouths. I don't even believe there should be a Fed, not with it's interest rate policies and attempts to manage the economy. The economic role of the government should be to protect the integrity of money and to make sure that rules and contracts are followed. No Fed = No bailouts = No artificial recoveries from recessions and catastrophes. Of course if you have a severe recession, all the socialist will scream about the unemployed and that they need the governments help, including jump-starting the economy. So we do have a Fed, and it tries to do what it can. After 9/11 it floods the economy with liquidity so that things don't freeze up, everybody and their brother starts doing something with real estate, and the rich start the private equity boom. The whole thing goes belly up, and the Fed tries to do more of the same to again jump-start the economy because nobody wants to buy mortgage-based securities, and the economy will collapse from chain bankruptcies if they don't intervene. The socialists scream "bail out of the rich". Well I want to see how loud they would scream if the economy goes belly-up and there is 20% unemployment.
And what do the high salaries at the top and the use of options have to do with the current discussion? Is it just a random class-warfare interjection?
Who in their right mind thinks that those who rob companies should go free? Most of those who did horrific crimes in the late 90's never got punished. They got Bernie Ebbers and a couple of others, but the rest are enjoying well-financed retirements. You think any free-market advocate is for leniency to the white-collar thugs out of some sort of class solidarity? I think it's your simplistic class mentality that's showing more than anything else. I'm disgusted with how little prosecution there has been for what those guys have done, and it is influence peddling. But if you think there are any human societies where some are not more equal than others, show them to me. Socialism certainly doesn't cure preferential treatment for some people. And where did John Edwards go to learn about poverty? Why it's one of the biggest hedge funds. Almost everybody always grabs as much money as they possibly can, whatever their rhetoric. The Clintons have turned their post-presidency into a money making machine, and Al Gore didn't sit on Google's board for minimum wage either. So come on, cut the class warfare boloney and work to get the guilty punished.
Comment by Igor R. — August 20, 2007 @ 5:50 pm
Jim in Chicago, you know nothing about my class. And I was born in the Soviet Union into total poverty, so you lose your bet.
Comment by Igor R. — August 20, 2007 @ 5:55 pm
So all of you that are critical of us "ruthless selfish conservatives" have emptied your savings with the compassion you espouse and have helped many of your fellow citizens?
You all are right on one thing, I feel NO desire to bail out people who signed a stupid loan document on THE BIGGEST purchase of their life. That is what your own family and friends are for.
For the record, I do not agree with what the Federal government has done for the banks either. That was your assumption as I never spoke to it.
Did not start life on third base but did go to a few Marine Bases.
Hey I have a credit card offer for 14% and if you miss one payment I'll jack the rate to 29.9%. Don't worry if you lose your job other Americans will bail you so there is no RISK. DA's
For the last time you guys have no concept on the founding of this country. If you firmly believe that the government should help people out of financial trouble, provide health care, or any other service. IT FALLS TO THE STATE GOVERNMENTS NOT THE FEDERAL!
Read the US Constitution, very simple and straightforward document.
Comment by Jon Pemberton — August 20, 2007 @ 6:02 pm
wwz,
Thanks for the name-calling glad you are on Brent's "Team".
Comment by Jon Pemberton — August 20, 2007 @ 6:08 pm
Although i agree with your basic thrust, as a professional tax preparer i don't believe these people will be liable for any income tax
Comment by Chuck — August 20, 2007 @ 7:00 pm
Excellent analysis Brent.
Comment by Mike5000 — August 20, 2007 @ 7:58 pm
Thanks, Brent, for an excellent article, which tells it like it is for the average person.
Comments like suggesting that friends and family exist for the purpose of loaning money to buy houses demonstrate only how utterly out of touch with the average person's reality the writer is.
I'm a person who lost nearly everything because of the so-called health "care" system, with its greedy and sloppy doctors (the reason for my illness being a doctor's unwillingness to take the time to figure out why there was excess bleeding during surgery, not even hidden in his surgical notes), then the thousands and thousands of dollars to stay alive and pay for adequate pain treatment, in spite of having medical insurance that was among the best (and having to continue to pay for it, though I was unable to work). But I was lucky, as I did have enough money to survive. Most in my circumstances would not.
Friends and family turned their backs. So did the entire system in the U.S. This is the real bottom line of a market system allowed to run rampant.
The selfish and mean-spirited comments of those who glorify selfishness and greed are nothing short of evil.
Comment by Heidi — August 20, 2007 @ 8:23 pm
Brent, socialism for the banks will stretch out the decline in real estate. Socialism for the poor will stretch out this decline in real estate values as well.
It would be better to get it over with, than to drag this out 10 years.
Except for daily liquidity, which is the feds responsibility of last resort, the market forces should be allowed to work, or the guy who is wanting to buy will never be able to afford the overpriced houses. Never!
Comment by Gary Anderson — August 20, 2007 @ 11:27 pm
Heidi,
We could all write about our own personal hard luck stories, but that is not the point.
I do not, nor did the Founders want a big FEDERAL Government. Anything not stated as powers to the Federal Government goes to the States. I have absolutely NO PROBLEM with State and local governments addressing this and other issues. I am adamantly opposed to Federal Programs including a lot of existing ones. Do you really want to concentrate even more power in Washington? Would it not be better to have different programs and options (choices) to choose from amongst the States? Think about it….
I did not say that your family and friends should loan you money to buy a house, but they should help you out when you need it.
I know you threw a couple of "titles" my way, but that does not further the discussion nor help with the exchange of ideas.
Comment by Jon Pemberton — August 21, 2007 @ 12:11 am
[…] Not so lonesome, as he's being joined by millions of Americans, as Brent Budowsky explains: A person takes out a $100,000 mortgage and has a $65,000 salaried job. That person gets his or her hours cut back, or wealthy executives downsize the company while they keep their large salaries and stock options, or ther job is lost by outsourcing to a country that pays slave wages with no benefits. Or the person suffers a health problem and incurs huge costs, which benefit wealthy healthcare companies, while consumers fight wealthy insurance companies and of course well-paid doctors. Assume that person had made five payments before the crisis that was beyond their control. When they are foreclosed on by the bank, they have lost all of their payments, gone forever, lost their home, forever, and then could be hit with a $30,000 IRS bill for the honor. The Fed’s lowering of the discount rate last week did little to nothing for these people. The bank then gets the foreclosed house, and can often buy the home back for virtually nothing if there are no bidders, and in the medium to long term will be able to sell the house for a slight loss, or a minor profit, or a huge profit if it has the capacity to wait. The Fed’s lowering of the discount rate helps these companies. […] In effect John and Jane Doe get screwed at each step along the way, from outsourced jobs, eliminated jobs, cost-cut jobs, costs from the ripoff medical system, and foreclosure — where they lose whatever payments they made as well as their homes, and then get a huge tax hit. Meanwhile, the prime beneficiaries of the Fed action are those who did the foreclosing and the banks, hedge funds and private equity funds who maneuver these assets back and forth between themselves, with fleets of lawyers and accountants helping them minimize costs and maximize ultimate profits with bridge money from the Federal Reserve (ultimately, American people’s money). […]
Pingback by The Not-So-Lonesome Ghost Of Tom Joad… « Mercury Rising 鳯女 — August 21, 2007 @ 6:02 am
Friends and families turned their backs Heidi? What kind of comment is that since your family knows you best, perhaps they trust you least. The entire system in the U.S. turned it's back? I don't agree. The system provides opportunities. I always thought selfishness is when you don't live up to your personal and financial obligations. It's amazing how liberals always label people as evil when all they encourage is personal responsibility.
Comment by Robert Rosencrans — August 21, 2007 @ 8:21 am
Heidi: You need to find new friends and family. Igor as always points out our argument as the one based in fact and reason. I want laws and rules enforced for all "classes" of people. The government unfortunately has tangled itself in our financial institutions to the degree they must manage to the least amount of damage. To say I want to see criminals go unpunished is Brent's lack of understanding of the people that oppose his tripe…
Comment by Rich — August 21, 2007 @ 11:37 am
Like Chuck in comment #18 (or so it seems), I'm baffled by the following statement: "When they are foreclosed on by the bank, they have lost all of their payments, gone forever, lost their home, forever, and then could be hit with a $30,000 IRS bill for the honor." What is being taxed here? The loss of the mortgage interest deduction will cause them to pay more tax, but not $30K more. They obviously would not be liable for taxation of capital gains. What tax is being referred to here, and how was that amount arrived at?
Comment by GM — August 21, 2007 @ 2:49 pm
The way I've read it in other stories is that any sort of "debt forgiveness" ie foreclosure, is counted as income by the URS even though the person being "forgiven" does not realize any tangible assets from it. So, if the bank buys your house for $1.00 and your loan is $199,000.00 you owe taxes on $189,999.00. People have successfully challenged this but they've had to hire lawyers and accountants to challenge it and there is a narrow window of opportunity to do so. If you are in such shape that you have lost your home that you may not have the resources to effectively take these steps.
One good thing that may come of this is when hordes of angry Americans take to the street for a second Revolution, this time with more in common with Robespierre than Jefferson.
Comment by lmwilker — August 21, 2007 @ 5:01 pm
A temporary state fund back in 1989 saved us from losing our home, a little row house in Baltimore. My husband was becoming disabled by diabetes. One child was severely disabled. Keeping people from becoming homeless is far less costly than after they are out on the street. But of course, that's the poor, not the middle class.
Comment by Pat Williams — August 21, 2007 @ 5:52 pm
lmwilker, your generally reasonable comment had an interesting ending: you consider a Robespierrian revolution good? A lot of blood spilled in an increasingly vicious and unreasonable fashion culminating in Napoleon? Of course I know that the hatred in the hearts of the defenders of the dispossessed has no bounds, you're just surprisingly honest about it.
Comment by Igor R. — August 21, 2007 @ 7:41 pm
HA, the Capitalist model. Why should anyone deserve a roof over thier head? Let's give it to a wealthy CEO who has rippied his employees off with his 9000% raise for flat sales and outsourcing some tech jobs!
The American education system aceived its aim after all..Conditioning
Comment by Zekewolfy — August 21, 2007 @ 8:16 pm
Heidi
Not only are these guys greedy, they are suckers.
They all say the same meaningless talking points, For God sakes, don't think, FOX or Rush will do it for you!
If you jerkz haven't been in a hard place due to NO FAULT of your own…you should count your lucky stars and shut up.
You're suckers because someday the 'rulers' are going to screw you too, and you'll just say, who saw that coming?
Why do you think Cheney 'bet' against a strong dollar and increased his portfolio some 30%? These guys bet on and against catastrophe and they could care less about anything other than profit and power. The robber barons just morphed into CEOs; the heirs are ready for another great depression so they can take everyones financial assets and move to Dubai.
Comment by Linda — August 21, 2007 @ 10:57 pm
I don't believe that it is the government's place to pay my bills, provide a home for my family, or guarantee my job. I believe that it is their place to make sure that I don't lose my job to an illegal immigrant or another country entirely…
Comment by Bulldog23A — August 22, 2007 @ 12:38 am
Where is the outrage that Howard Dean used to energized the democratic electorate. This energy is missing in this years crop of presidential candidates.
While they focus on the timetable of withdrawl from Iraq the privatization of intelligence collection (spies) goes on, the creation of mercenary army's by our government goes on.
If we are not careful we will be nibbled to death by a duck who takes small bites while we keep trying to catch the big fish that is only the reflection of what is really going on, much like the Plato's reflection in the cave.
Comment by Mark Hamilton — August 22, 2007 @ 3:07 am
Jim your right. it's OK for the rich to get their breaks and bailouts at the cost of everybody else, but the middle class is suppose to be responseable for themselves. what a croc of crap. that's that "ME" attitude and "screw you". these people are not Americans, they are greed mongers and i would rather deport them and keep the iilegal aliens. at least they understand the part about "WE" the people. god bless you jim for saying the truth.
Comment by john howell — August 22, 2007 @ 7:32 pm
Where do people get the idea that freedom means not caring for your neighbors or those who are less fortunate?
What freedom is there in living in fear of being a paycheck or two away from losing your home? What freedom is there in not having healthcare? What freedom is there in being nothing more than a cog in a corporate wheel? This isn't freedom. It's slavery, nothing better than that.
This is the status of most people in the U.S. today. Those who wish to call it freedom don't have a clue about that word's meaning.
What of those people who are born with disabilities, or develop them? Don't they deserve an opportunity at a real life? It takes a system that believes in social responsibility - socialism - to provide the best for the most people. That doesn't mean a nanny state. It means helping out those who meet with bad fortune. It means caring about other people. That's all. It doesn't mean giving up one's rights. There is far more freedom in such a system than there is in a completely market-ruled one.
Comment by Heidi — August 22, 2007 @ 7:54 pm
We ARE a socialist welfare state - FOR CORPORATIONS and THE RICH. I believe in the separation of Corporation and State. I also support the death penalty - for Corporations that commit crimes(especially multi-nationals which have NO national loyalty or identity). Corporations should not have special rights when our own citizens can't have equal rights. Corporations are not people, nor are they families. What a bizarre "country" we live in, where the Rich can never be rich enough and the poor are never poor enough. Who are we?
I don't believe we are America, anymore.
Comment by new age WOP — August 23, 2007 @ 12:21 am
I read the article and it sounds like beautiful socialist propaganda, but the sad fact is that some/all of his facts are a bit… wrong.
First off - Banks don't want to foreclose on houses - because they lose money in the process and have to writeoff the losses which depress their stock price because it hurts their earnings. Banks would rather keep the person paying some kind of reduced payment so at least they are getting their interest. Again, banks are in the business of lending money, not foreclosing on houses which they land up outsourcing anyway and only get pennies on the dollar for the homes.
Secondly - most of the mortgages are not even held by banks in the traditional sense. They are sold to servicing companies whose vested interest is to have people keep paying those interest payments.
Thirdly - most of these people who are being foreclosed on have interest only loans therefore they have not put in any equity into the house so when he says they lose everything they put in there house that would be zero. Plus in many cases they have second liens or HELOCs and have been using their home like an ATM buying trips to Disneyland or buying a new car. The party is over.
I agree about comments on healthcare, the downsizing, the outsourcing, but his jumbled mess of an argument leaves me a bit non-plussed. The funny thing is that he mentions the fed funds rate which is directly connected with HELOC rates (i.e. the House ATM). Sure a cut in that rate would help them out, but they would probably spend the saving rather than pay down their debt.
Let's get real over the past 10 years the American people have gotten fatter, lazier, and stupider as well as more self-absorbed.
The housing market was really the last grape of value in this triple deficit economy.
Alas what did the Romans do when they knew the end was nye…
They discovered opium!!
Comment by Jon C — August 24, 2007 @ 1:50 am