The Failed Bailout: A Drop in the Bucket and Abusive to Renters

Household debt has also reached unsustainable levels. The household savings rate dropped from over 10% of disposable income, in the 1980s, to a record low of 1% earlier this decade. At the same time, household debt has risen, from "roughly 65% of disposable income in the early 1980s, to 80% in the early 1990s, to 95% in 2000...." Earlier this year, BusinessWeek exclaimed that household debt has gone "through the roof," amounting to "almost $14 trillion, nearly equal to the annual output of the U.S. economy." The combined debt of households and the federal government now amounts to over $23 trillion, or 168% of GDP, "far higher even than in the brief spike during World War II."

Working families suffer declining purchasing power for other reasons, too. The credit crunch emerging in the wake of the crisis is "further crimping budgets and family spending" by restricting access to capital. Despite various "indirect subsidies," over 40 million Americans lack health insurance, which not only adds further uncertainty and depresses spending, but also the foremost catalyst of bankruptcy. The healthcare and credit crises find further fuel in the rising costs of higher education, as well as worker-management pay differentials that have grown a hundred-fold over the last generation. Put simply, Americans make less money than we used to, yet we (sometimes by necessity, but more often by choice) spend more.

Ultimately, "even if by some miracle the financial meltdown could be resolved tomorrow...powerful forces already at work...will suppress business activity. The failure of several more financial institutions would make things somewhat worse; but saving them would not make economic prospects much better."

Berkeley economist Barry Eichengreen forecasts unavoidable budget deficits, higher taxes to service that debt, higher interest rates and more strictly regulated banks that will lend cautiously. "We've had a decade of relatively successful economic growth and have been living beyond our means," Eichengreen said. "Now we'll have a decade of the opposite. It's payback time."

Protecting the Little Guy?

Democrats called last week for attention to the needs of homeowners, arguing that an effort to save banks should not ignore "the little guy." Speaker of the House Nancy Pelosi was blunt: "We will not simply hand over a $700 billion blank check to Wall Street."

The compromise that eventually emerged from the White House bore few mechanisms to concretely help homeowners facing foreclosure. For instance, a proposed provision to allow bankruptcy judges to alter the terms of troubled loans was rejected. Instead, the bill merely invites banks to consider relaxing loan terms and provides some tax breaks for homeowners facing foreclosure. (At the same time, incidentally, the GOP's latest assault on voting rights has taken the form of seeking to disqualify voters who suffer foreclosure).

Solutions that actually help borrowers secure more favorable terms from their banks would be innocuous. In sharp contrast, the Administration planned to buy loans en masse from the banks themselves, in exchange for equity warrants that could theoretically be exchanged for stock if the banks recover in the future.

However, more robust protections for homeowners can hold troubling implications. On the one hand, individuals & families deserve government support more than banks. But distributive concerns raised by most observers overlook the one-third of Americans who rent our homes.

Renters Take it on the Chin: Moral Hazard & Distributive Injustice

Renters - roughly 100 million of us - pay taxes just like homeowners. In fact, we pay more taxes, since homeowners receive massive government subsidies through tax deductions for mortgage interest. Yet, while proposals for mortgage relief (such as the rejected measure that would relax bankruptcy rules) would help homeowners whose assets are threatened by the downturn, the most renters have been offered is the right to remain in our homes should our landlords suffer foreclosure.

Why should renters bear a disproportionate burden of insulating banks from accountability for making bad investment decisions -- or homeowners, for their's?

According to market principles, banks should bear the responsibility of their poor risk management. Rewarding failure ("moral hazard" in the language of economists) is untenable in a market economy. Outrage at the idea of the government paying banks for failing was one issue prompting the revolt by House Republicans that sank the bailout.

Peter Goodman explains that "[t]he financial system got to its dangerous perch by betting extravagantly on real estate. When housing prices began plummeting and borrowers stopped making payments, financial institutions found themselves with huge inventories of bad loans....These were the investments that Wall Street bought, sold and borrowed against in cooking up the money it poured into housing." Beyond being greedy, banks may stand at even greater fault: the "possibility of fraud" has prompted investigations by the FBI of several firms that have sought government assistance, and federal housing and Treasury authorities have criticized predatory lending techniques such as "deception or fraud, manipulating the borrower through aggressive sales tactics, or taking unfair advantage of a borrower's lack of understanding about loan terms."

Like banks, homeowners accepted "risk, an essential part of capitalism," when choosing to buy their homes. Conventional wisdom may posit that real estate prices never go down, but no rationale suggests government price supports. Like the banks that extended them loans beyond their means, borrowers made decisions about how to allocate their capital that proved to be catastrophically bad.

In contrast, we renters look pretty smart these days. Or at least we did, until the bailout proposed to punish us for correctly opting not to invest in an unsustainably inflated market and foregoing the capital appreciation enjoyed by those who profited (often immensely) from the speculative bubble. Driven by recognition that the "bailout requires responsible Americans to pay for the acts of greedy bankers, mortgage brokers, flippers, and over-extended home-borrowers," some 60,000 have signed the petition at www.angryrenter.com, which decries "whining from reckless home borrowers and their banks."

On the one hand, the blatant unfairness in rescuing corporations that pay lavish salaries to rich executives, while letting working families suffer, has raised predictable outrage. "How is it that the administration and Congress, which have not tried to find huge amounts of money to, say, improve the nation's health insurance system or repair bridges and tunnels, can now be ready to come up with $700 billion to rescue the financial system?"

On the other hand, banks are so deeply embdedded in the economy that their failure will hurt everyone. "[I]naction...could imperil the retirement savings and other investments of Americans who are anything but rich."

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