The housing crisis bailout: No taxation without representation!

Filed under: Economic data, Politics, Headline news, Housing, Federal Reserve, Recession

Recently, former Federal Reserve Chairman Alan Greenspan announced that the country is currently in a recession and that “the U.S. economy will not stabilize until the housing markets recover.” He compared this to the Savings and Loan crisis of the late 1980s and mentioned that another organization similar to the Resolution Trust Corporation (RTC) may be necessary to resolve the situation.

I have repeatedly highlighted the parallels between the late 1980s and our current crisis. Part of the solution may clearly involve an organization similar to the RTC. This has generated debate over the role of government in resolving the crisis and who should ultimately bear the cost. Nevertheless, based upon comparing this to the S&L crisis of the late 1980s, there is decent evidence that this crisis will not be resolved until the housing crisis abates.

We may want to examine the differing ways that the Japanese Banking Crisis and the Swedish Banking Insolvency of the 1990s were resolved for guidelines. Under the Japanese scenario, the banks were given a lifeline and hesitated to write down the bad loans. This resulted in one of the longest economic slumps and bear markets in recent history. Only now is Japan starting to emerge from this downturn, almost 20 years after it began.

The Swedish Banking crisis involved the temporary nationalization of insolvent banks by the government. The banks were restructured and then sold. Regulations were put in place to prevent a repeat of the situation. This crisis was much shorter in duration, and the banking system emerged in a much stronger position.

There are many issues associated with such differing solutions, including “moral hazard” and who pays the bill for the cleanup. These are serious matters and should be debated strongly before any action is taken. However, such a discussion and action plan is preferable to the current developing situation — a piecemeal bailout with the taxpayers paying the bill and having no say in the process. To borrow a phrase from the Revolutionary War, there should be “no taxation without representation.”

Doug Roberts is the Founder and Chief Investment Strategist for ChannelCapitalResearch.com and the author of Follow the Fed to Investment Success: The Effortless Strategy for Beating Wall Street . He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.

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This entry was posted on Sunday, April 13th, 2008 at 9:07 am and is filed under Real Estate and Housing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.