Yesterday my assistant Tito missed an important late afternoon meeting because the train he was on from NYC was delayed by more than 3 hours. The train slowly crawled north on tracks that were in too poor condition to support a higher speed. This is a regular occurrence on this line. Perhaps a few tens of millions would be required to bring these tracks up to something other than third-world condition. That money does not exist at the moment, so they will be “repaired” all the way back to “almost functioning,” just like last time.
Meanwhile, the Treasury made this announcement today:
WASHINGTON (Reuters) – The U.S. Treasury Department will on Tuesday tap a $50 billion housing rescue fund to pay off mortgage investors and reduce monthly payments for millions of borrowers, said a senior administration official.
That, in a nutshell, displays our nation’s priorities. Another $50 billion to pay off mortgage investors, yet no money can be found to repair critical existing infrastructure.
This program is being sold as though it is “helping homeowners,” but, in fact, the program directly funnels money to the companies that made poor lending and investing decisions. No cash goes directly to homeowners, it only flows to mortgage investors. While it’s true that some homeowners will have reduced payments, it’s important to note that cash is only flowing to companies, not homeowners.
Day after day we are reminded that protecting mortgage investors is our nation’s highest priority. At least that’s where we are putting tens of billions, without any sign that there’s some sort of limit as to how far we’re willing to go, and no indication that perhaps mortgage investors deserve to lose their money.
After all, the types of mortgages being fixed here are not primary liens, but secondary liens, and the originators and purchasers of these types of loans should have known better:
"It will be a shared effort with lenders, investors, borrowers and the government to ease or extinguish second-lien mortgage payments," a senior administration official told Reuters.
During the height of the housing boom, some borrowers were able to buy a home with no downpayment by adding a second lien, and many of those loans are now failing as the economy and housing market struggle.
The especially grating part of this story is that these second lien mortgages were used to enable borrowers to buy houses with no money down; an action that was widely known at the time to be an especially foolish and risky business decision.
I want to contrast the eager and unlimited desire to bail out mortgage investors with a troubling story I recently heard.
This weekend at Lowesville, one small business owner recounted that their decades-old family business was facing extremely trying times. The people in their employ had been working there for years, and so this small business owner described a tale of burning through cash reserves to try and keep their staff employed during exceptionally lean times.
This is the type of company that needs and deserves help. Instead, they are now struggling with the latest outrage, a recent change to the COBRA laws that now require (force) small businesses owners “to ‘front’ the subsidy by paying the full premium and obtaining a reimbursement via a later payroll tax offset.”
Did you follow that? As part of the 2009 stimulus bill, the US government decided to provide a COBRA “subsidy” by covering 65% of the cost of post-employment health care coverage to the newly laid off. That’s certainly admirable, I suppose.
But the government did not provide cash for this “subsidy,” opting instead to require businesses to come up with the actual cash to cover the cost. These out-of-pocket business expenses are going to then get ‘reimbursed’ sometime later, via a payroll tax offset.
In other words, cash flows out of businesses for COBRA payments, never to return. All that potentially ‘comes back’ later on is a reduced requirement to send cash to the government in the future.
Now, imagine that you are a struggling business, where your survival or demise is a narrow margin of cash flow. What good is a future payroll tax offset if COBRA payments drag you under today?
This is happening even as you read this.
How can Washington be this tone-deaf? Are they not aware of how many small businesses are struggling to survive and that cash flow issues are the #1 cause of business failure? Perhaps this is what happens when lawmakers lack actual business experience in their background.
We can speculate as to why this approach was taken with small businesses when so many hundreds of billions are immediately available to protect the poor investment decisions of mortgage speculators and large banks, but I am unable to think of a good reason for this discrepancy.
It bears noting that small businesses are the lifeblood of our economy and that all recoveries are built upon the backs of small businesses, which are the first to return to health and hiring following a recession.
Instead of helping them and punishing the improvident, the exact opposite is happening and we are left to wonder why.
One could be forgiven for surmising that the government is finding what few pockets of solvency that remain (i.e. small business cash accounts) and using those to fund the recovery because the government itself is out of cash.
This seems like a terrific way to ruin a nation.
It would seem that our national priorities are still not in the right order.