Economic Disasters Need Taxpayer Support

It’s one of those days. Reading the financial press is a delight; the big challenge is deciding what to laugh at first.

Take your choice. There’s Martin Wolf, writing in The Financial Times, with a claim that is so staggeringly conceited, the gods must have marked him for punishment before the ink was dry. He thinks economists should be thanked, not merely for saving the world economy…but for saving civilization itself. We will come back to this later…after we’ve had a chance to catch our breath.

There’s another report in The Financial Times about our hometown, Baltimore, Maryland. A few years ago, the city’s meddlers bawled and whined about how the banks had “red-lined” Baltimore’s urban center. Red-lining was the practice of not lending to people who were not likely to pay their mortgages. Finally, Congress passed a law requiring the banks to lend to poor credit risks – which is how the subprime industry got so big. The banks then discovered that lending in minority areas was a goldmine – as long as they could lay the paper off on someone else. Eventually, all the pieces were in place. The feds required it. The feds helped fund it with low rates. And Wall Street securitized it…taking much of the risk away from the lenders themselves. Pretty soon, the banks were “reverse red-lining,” actually targeting poor people so they could lend them money.

“We’ve had people in our office who were qualified for a mortgage based on their Ebay earnings or their gambling income,” says a local housing do-gooder.

Which just goes to show we were right. If you’re going to make a really big mess of things, you need taxpayer support.

Well, now the sub-prime loans have blown up. In the third quarter of 2009 alone, 15% of sub-prime mortgages were in foreclosure; nearly 30% were delinquent. So, now the poor people are complaining that lenders took advantage of them…and rather than admit that they should have left well enough alone, the meddlers are blaming the banks for sharp credit practices. The city of Baltimore is actually suing Wells Fargo for “reverse red-lining,” which just goes to show how shameless these politicians can be.

And guess what? The city will probably win. They’ve got a hotshot, ambulance chasing lawyer on the case. He’s already won a ‘reverse red-lining’ case against a bank. And he’s got a motive to win; he’ll make millions on the case. All he needs is a jury of nitwits to stick it to Wells Fargo.

The Daily Reckoning