Francis Fukuyama

Washington's still betting the bank on Trickle Down theory

I've been feeling a little Francis Fukuyama these days, feeling like I'm at the end of history. How can I complain about job loss -- even repeated job loss -- when people are losing their homes to foreclosure? People say that buyers should have been more wary and not jumped into subprime loans. I don't buy it. I think people were steered into these nasty loans. I heard last week that 20% of people in subprime loans would have qualified for regular mortgages. So, why steer them into a loan that balloons in 2 or 3 or 5 years, making the monthly payments skyrocket? Money, money, money. These mortgage brokers were out to serve themselves.

It shocks me that we, as a nation, are debating rescuing the enriched firms that caused this mess without also requiring that homeowners be helped.

I mean, here's the logic I keep returning to. If it's the bad loans -- the unpayable mortgages -- that are wrecking the balance sheets of the Lehman Brothers and AIGs of the world, then shouldn't we be trying to make sure those defaults stop happening? My logic doesn't penetrate the Trickle-Down types in charge, though. Here is Treasury Secretary Henry Paulson's reasoning on how the panic will stop (via New York Times columnist Paul Krugman):

When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem.

I've also heard the same explanation, essentially, in easier-to-understand terms. Paulson and the other rescue warriors believe that once the bankers feel it's safe to begin lending money again, potential home buyers will get the loans they need. They'll buy homes, prices will begin to rise again, the abandoned homes will be re-inhabited, and everyone will be happy. The reassurance that Washington is offering to bankers will have Trickled Down to us little people.

But it's beyond me how people can keep supporting Trickle Down when it so clearly has done nothing good for our economy since Ronald Reagan ran on it in 1980. Where are the results? And if it's not working, then why not help homeowners who are facing foreclosure directly?