Welcome to Scott Turner's blog.

The U.S. government is about to take a big step in the wrong direction. I’m caught up in what’s going on, and feel compelled to express my thoughts. Maybe they’ll do some good if you call your congressman today.

I’ve known for some time that mortgage lending had gotten out of hand. In 2007 my daughter and her husband were considering whether they could afford to own a small home. I checked out the mortgage terms that were outlined for them, and was glad to see that they were looking at a straight, fixed-rate mortgage, rather than an adjustable-rate or worse, and I cautioned that you really do want to have a substantial down payment.

A few months ago, it was still something of a shock to me to hear how Countrywide Financial, shortly before it collapsed, was making profits by arranging fraudlulent, doomed mortgages.

Now the effects of those mortgages and similar weakly-backed securities have propagated from mortgage lenders to investment bankers and other banks. No one knows who to trust with their money, and it’s beginning to affect the ability of some businesses to get the short-term loans they depend on. It is the job of the Federal Reserve to keep lending going and avoid a panic, so it’s to be expected that Chairman Bernanke would deal with the problem.

Consider what went wrong. Risky loans were advanced, and were put on the books of lenders with a certain value, and when some home values went down, some of those loans became worthless. There was some fraud, some speculation, and some fancy financial contract-making going on, all leading to a situation in which investors did not and could not know how risky their investments were. Whether those investments were in mortgage-backed securities or in banks, they were at risk and couldn’t find out.

1. Opaque, risky securities.
2. Credit so tight as to raise doubts about the economy.

It’s not surprising that Chairman Bernanke would come to Congress with a proposal. But what a proposal. The essence of the program is for the U.S. to borrow money and spend it on buying the bad debt. It doesn’t directly address either of the problems!

That’s why I sent messages and blogged a week ago against the bill, knowing full well that it would be prettied up with good things to make it more palatable. Even if it addresses sustainable energy technology, deposit insurance, etc., the U.S. cannot afford a $700 billion mistake.

Yesterday the PBS News Hour hosted three economists, two in favor of the bill and one against. The economist most in favor said that the bill was necessary to calm the panic. The next one agreed, while saying that the only really good part of the bill was the boosting of the FDIC bank deposit insurance. The third economist said that the bill isn’t going to address the actual need.

The bill will calm the panic for a while, until the realization sinks in that little has been accomplished, and that the U.S. is asking for more loans from foreign banks while having done nothing towards becoming more credit-worthy. It looks as if our dollars will be safe in the banks, but they will be worth considerably less.

I’m disappointed in both Obama and McCain. They claim to be bringing change to Washington, but both have climbed on the bandwagon supporting this bill. At least Obama has said there will be more to be done beyond passing the bill, before the financial system is straightened out. But that admission is not enough. Spending $700 billion to temporarily sidestep the real problems is a bad thing right now.

We urge you to oppose the legislation that currently has the attention of the Senate, Congress, and the press.

We read Chairman Bernanke's testimony yesterday, and are nearly persuaded by it. However, it is troubling that the core of the plan is to buy up the securities which are rightly called "toxic". Experts say that there's no guarantee that the purchased securities will turn out to be have an actual value near their purchase price. These "assets" should not have been created in the first place. What they need is transparency, and massive scrutiny. The planned legislation will put the needed scrutiny on hold.

Corporations are unable to sell these securities because the way the law works now, their bottom line is impacted when the sale occurs. Regulations should be changed so that corporations are required to take the hit immediately. That would lead to much needed transparency for those businesses, and would make the market for these securities more liquid.

Much in the news are the efforts of Democrats and others to modify the bill so that it will benefit homeowners more directly, will prevent financial executives from profiting excessively, etc. These are excellent changes, however, the "lipstick on a pig" is phrase is spot on in this case. They don't fix the essential problem with the bill, that it puts the U.S. in a position of supporting bad securities, and does so at a massive, almost incomprehensible scale.

Not enough attention has been paid to how this bill is paid for. The options are taxes, borrowing, or "printing money". You know very well that taxes are out of the question at this point. The alternatives of borrowing or "printing money" are extremely risky for the U.S. economy, because they can easily lead to panic dumping of U.S. dollars.

What are the terrible consequences if the mortgage bailout is not passed? People won't be able to get a car loan or credit, causing failure in the auto industry and depression in the economy as a whole? Yes, that possibility must be addressed, so do it head on! A federal program could back new loans that are made under sufficient scrutiny that the private sector will be eager to invest in them.

Secretary Paulson said that the outlook apart from this legislation is "grim". With it, we view the outlook as even grimmer. We look to you for a completely different approach.

My wife and I sent the above to our senators and congressman yesterday morning. Since then President Bush has addressed the country, and has adapted the legislation in a number of ways to address the concerns of legisators. The changes are all for the better, yet there is much in the process which needs criticism, and I continue to regard the bill as a mistake which should be cast aside and restarted.

President Bush is again getting his way by bringing his defective solution to a supposedly urgent problem before congress, and I can only watch as congress again imitates a “deer in the headlights”.

I reread the gospel of Luke chapter 16 verses 1-8, a parable which matches the current situation in striking fashion. Unfortunately, the point of the parable is spritual rather than economic, so its relevance is secondary. But I'll bet you get a kick out of it.

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