Why the Bail-Out May Not Matter

By Joel Persinger
YourRealEstateDude.com

As of this writing, the House of Representatives, under pressure from constituents who vehemently opposed the 700 billion dollar bail-out of the country’s financial system, defeated the measure on a vote of 226 to 207. Both Democrats and Republicans opposed the measure in large numbers. Stocks tumbled on the news with the Dow losing nearly 800 points. But, what does this mean for the real estate market?

To answer this question, let me take you back in time. In spite of what you may have heard, the U.S. Congress has been pressuring Fannie Mae and Freddie Mac to increase the availability of home loans to low income families for many years. That is how the “sub-prime” market was born. Many high ranking members of government argued against the expanding of such lending practices without success. Most notably, then Treasury Secretary Snow made such arguments and urged Congress to change its ways and further regulate Fannie and Freddie back in 2001. Former Fed Chairman Greenspan did the same some time later. In fact, for the past seven years, members of the current administration have been warning Congress that the financial system might well collapse under the strain if Fannie and Freddie were not reigned in. Congress did nothing. Thus, if we are honest about it, we can clearly see that Congress’s effort at forcing our financial system to provide loans to those who have no way to pay them back was a recipe for disaster.

Now that we’ve figured that out, we must ask why the same Congress which refused to address the coming train wreck, even after having been warned repeatedly, is now attempting to use the White House’s proposed bail-out for the purpose of rescuing the failed system they refused to correct. Instead of allowing the marketplace to replace homeowners who cannot pay their mortgages with new homeowners who are financially sound, many in Congress would like to keep those who cannot pay in their houses by passing the cost along to the taxpayers. In order to accomplish this, the news has spread the notion that nobody can get loans because lenders aren’t lending and banks are collapsing all over the place. Nothing could be further from the truth!

The truth is that homebuyers are buying! Prices are low, interest rates are great and the banks which are strong because they did not get involved with the sub-prime market are happily lending to qualified buyers. In addition, the banks which are failing are being gobbled up by banks which are financially strong. I had money in Washington Mutual and guess what… my money is still there because a strong bank purchased WAMU when it failed.

Our financial system is working, but it isn’t pain free. People who acted wisely are winning and those who acted foolishly are losing. That is how life works and if the government stays out of it, the market will heal itself. The problem is, you don’t win an election by letting people experience the natural consequences of their choices.

Does the bail-out really matter? The answer is both yes and no. If you are trying to win an election, then perhaps the answer is yes. If you are concerned about the health of the market and the future of our country, then the answer is a resounding no. If left alone, the real estate and financial markets will take care of themselves.