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The Feds and the Government Need to Bailout Homeowners in Foreclosure

By Byron A. Ellis-September 19, 2008

Risk management is the ability to foresee and understand possible outcomes associated with a given action or actions. The ability to manage risk is not the same as experience. Experience is exposure, often over time, to actions or activities. It is quite common, however, to confuse risk management with experience.

Risk management is a continuous learning process that leads to outcomes with high probability of success. Conversely, experience is a discrete process where an individual have repeated exposure to an event or activities for long periods of time, with no guarantee that outcomes will lead to high probability of success.

Many experienced chief executive officers (CEOs), such as those that led Lehman Brothers, Fanie Mae, Freddie Mac, Merrill Lynch, American International Group, Inc. and others, as well as many politicians who are paid to understand and manage risks have proven to be clueless.

Nonetheless, these CEOs, in the face of monumental failures, are given golden parachutes worth millions of dollars. And, politicians in the face of a failing economy are incapable of properly diagnosing the cause of the problem or implementing appropriate policies to remedy the problem.

Even the Federal Reserve (Fed) and other high paid government regulators and officials failed to understand the root cause of the economic problems. They failed to recognize the dire consequences of the Iraq invasion “war tax” on consumers’ disposable income and hence on the economy. Rather, they told the American public that the economy could absorb high gas prices. The “war tax” is the spike in crude oil prices resulting from the war induced Middle East instability.

In the United States, private consumption is between 50-60 percent of the gross domestic product (GDP), investment is between 20-30 percent of GDP, and government purchases is between 20-25 percent of GDP. Thus, the biggest driver of GDP is private consumption. However, a large portion of consumers’ disposable income had to be allocated to the “war tax,” which accrued in the coffers of “Big Oil.”

As a result of paying the “war tax,” many consumers had difficulties covering inflated mortgages and saw their properties go into foreclosure.

However, instead of the Fed and the government bailing out consumers (the drivers of the economy), government officials opted to ignore mortgage holders in foreclosure; and, they callously argued that homeowners should have known better and should not have invested in homes they could not afford. Ironically, the Fed and government officials did not tell incompetent financial CEOs that they should have known better than to invest in inflated mortgage securities. Rather, they bailed them out, allowing the CEOs to escape with millions of dollars in compensations.

The Fed and the government need to bail out homeowners in foreclosure, doing so will stabilize the housing and financial markets. Moreover, the government needs to mandate greater transparency in the financial market by implementing effective regulatory processes.

Lastly, the performance of the existing financial regulatory agencies has been dismal. Therefore, individuals at the helm of these agencies should be redeployed to areas in which they have comparative advantages, if any, without any compensatory packages.

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