Obama’s Financial Booty-Call

“I want you. I need you. But there ain’t no way I’m ever going to love you. Now don’t be sad, ’cause two out of three ain’t bad.” – Meatloaf, Two out of Three Ain’t Bad

Last week president Obama called on banks to make some loans to riskier borrowers. The first retort to this is rather obvious: we’ve tried that before (and not that long ago) and know exactly how it will end … poorly. This leaves me with two plausible explanations. Either the president believes that by his words he can change the economic realities of what happens when risk is improperly priced – OR – he’s engaging in a financial booty call.

Inflationary government and central bank policies serve to transfer wealth from the poor and middle class to the wealthy and politically connected. Those with “first access” to the money created from thin air make out like bandits, while those with “last access” get wiped out.

In the housing bubble, an inflationary boom that saw the new cash flow into real estate at unwarranted levels, this was manifest in the destruction of home-ownership dreams for the poor and those with “riskier credit” … the very people Obama wants to “help” now. Folks with money and good credit upgraded their houses first. The pool of good borrowers evaporated before the pool of government backed free money (Fannie Mae, Freddi Mac, and their implicit government backstop), so the banks had to find new borrowers and new ways to get them to borrow. So, they started making loans to riskier borrowers (ahem). Once those with not-so-great credit were all used up loans were made to obviously bad credit risks. (Remember the NINJA loans? No Income, No Job or Assets.) Once all of those poor guys were taken up, and the flippers had reached the end of their credit line, the bottom fell out. And who got hurt? Was it the people who bought houses in 2000 as the bubble was just getting started, or those who bought in 2006 at the top? The poor, the financially weakest, were the ones that got blasted.

Now president Obama wants them to take on some loans again. As we noted before, he either thinks this time will be different (ugh) or he knows it won’t, but needs the short-term feel-good story of a new housing boom to make the economic numbers look better. You know, using the poor and needy (in this case financially needy, rather than emotionally needy) to satisfy his own selfish, short-term desires … a financial booty call.

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