The program was supposed to help homeowners in over their heads not default on their mortgages as well as bail out financial industry players like AIG, Fannie Mae, Freddie Mac, Citigroup, GE financial services and others who overleveraged themselves as much as 40-1 during the Bush credit bubble/housing bubble and now face insolvency and bankruptcy.
This week the Bush administration, backed by the banking industry, decided that the program would now only be used to bail out banks and financial sector players and not modify mortgages for homeowners struggling to make payments.
The argument the administration made, through Secretary of the Treasury Hank Paulson, is that bailing out insolvent homeowners will create a "moral hazard" that will
persuade some people to stop making mortgage payments in addition to helping people who already have stopped making payments. The industry argues that this would translate into higher interest rates because investors would demand compensation for the increased risk of loan defaults. That, in turn, would limit the number of people who can afford mortgage loans.
Now I think you can make a pretty good argument that by bailing out homeowners who own homes with values artificially inflated by the housing bubble and salaries that cannot cover the mortgage payments, you are ultimately extending the economic downturn resulting from the bursting of the housing bubble.
After all, housing prices still remain, on average, too high across the country for the salaries people are, on average, making.
Until home prices drop or salaries rise so that the ratio between home prices to salaries goes back to its historical ratio, some overleveraged mortgage owners are going to have trouble making their payments and are going to go belly-up on their mortgages.
Which means home prices will continue to drop, the home builders industry (and the ancillary other industries that do business with it) will continue to slump, and interest rates will continue to rise even as Uncle Ben Bernanke and the Federal Reserve drop the fed funds rate below 1%.
That said, why should future American tax payers have to front the bill for all these financial sector companies like AIG, Fannie Mae, Freddie Mac, Citigroup, et al. who made bad bets on the housing bubble and now want the government to cover them for their mistakes?
Especially when many of the men running those companies don't seem to be tightening their belts the way working and middle class Americans are?
For instance, the boys running AIG, the largest insurer in the United States, have been particularly egregious in coming to the government to gobble up bail out money (so far $150 billion and counting) while continuing to pamper themselves with manicures, pedicures, spa visits and the like. Even a Republican Congressman was disgusted by the display:
"This unbridled greed," said Cong. Mark Souder (R-IN), "it's an insensitivity to how people are spending our dollars."
But now Mayor Bloomberg, the little mayor who engineered a backroom putsch last month to ensure that he will remain at City Hall for another four years, disagrees with Congressman Souder and says that Wall Street executives at companies being bailed out by tax payers deserve end of the year bonuses and other perks and compensation.
Never mind that they drove their companies to the brink of bankruptcy (and I would argue that some of them will eventually go bankrupt anyway, regardless of the amount of money the government throws at them), Bloomberg says they deserves their bonuses.
And what bonuses they will be!
Before the government bailout, bonuses for Wall Street employees were going to be cut by 70% this year. But now that tax payers like teachers, cops, auto workers and the like have provided $2-$3 trillion in bail out funds for the financial sector, bonuses will only be cut by about 40%.
It's good to know my hard-earned tax money working in an overcrowded, decrepit New York City public school can go to helping out the poor guys at Goldman Sachs and Morgan Stanley spend money on expensive cars, spa treatments, real estate, cocaine, hookers and whatever else these crooks like to consume.
To quote Mel Brooks, it's good to be the king!
Bloomberg is backing up his Wall Street cronies at the exact same time he is telling working and middle class New Yorkers they have to pay higher taxes (including property and sales taxes) while accepting huge cuts in services (education, parks, senior citizen services, libraries, dental clinics for the poor, etc.) And he is also going to raise the price of fees the city charges for parking and other licenses.
You see, Bloomberg's Wall Street cronies, who greedily raked in trillions of dollars over the past few years by lending out money to people who shouldn't have gotten loans and mortgages, then packaging those "toxic" loans and mortgages and selling them to investors, hedge funds and the like, all the while overleveraging themselves at a rate of 40-1 - they deserve bonuses.
You New Yorkers who try and pay your bills, ride an overcrowded, decrepit subway system to work, walk on dirty, disgusting New York City streets, send your kids to overcrowded, decrepit schools - you deserve higher taxes, higher fees, and cuts in services.
The only good news out of all of this is that Bloomberg's popularity has always been tied to how well the city economy is doing.
The last time Bloomberg's popularity fell below 50% was in 2002 when Bloomberg made some "tough" cuts to services and raised taxes and fees in order to deal with the economic fall-out from 9/11 and the 2001 recession.
The state and the feds helped cover city shortfalls, eventually the economy turned around and the little mayor became very popular with city voters.
The difference this time around is, Bloomberg is up for re-election just as he is calling for the tax and fee hikes and service cuts, the feds and state are carrying too much debt to help the city out and voters aren't all that enamored with the little mayor after his backroom putsch to overturn term limits.
So if nothing else, by backing his Wall Street cronies at the same time he is telling the rest of us to tighten our belts and stop whining, he may be providing another weapon his political opponents can use against him next year during the mayoral race.
Given that he is going to spend $100 million or more on his re-election bid, his opponents are going to need all the ammunition they can get.
UPDATE: Atrios notes that while TARP will no longer be used to help out overleveraged homeowners, it will be used to back gift cards for the holidays.
Whew - that's a relief!