Christmas Cheer

The clowns in charge of things understandably feel that they have to do something -- or pretend to -- in the face of what is shaping up to be not just a credit "crunch," but a potentially lethal illness in the credit system per se -- that is, in the very process of trading in paper that claims to represent faith in the future creation of wealth. That process underlies all of modern finance.

President Bush, seeming very much the clown-in-chief, led the way last week by proposing a mortgage crisis bail-out that would appear to have no chance whatsoever of working as advertised. He called it, arrestingly, the Hope Now Alliance. It blithely assumed that those "servicing" mortgages -- that is, collecting the monthly payments -- have the ability to suspend scheduled upward re-sets of adjustable mortgages for five years for certain select homeowner payees -- so that theoretically said homeowners could avoid foreclosure.

What might have worked in 1934, when the originators of mortgages were local banks that also "serviced" them (i.e. collected the monthly payments) is unlikely to avail today since the mortgages have been sold off in bunches to pension funds, hedge funds, money markets, and foreign investment funds -- none of which have an interest or the ability to renegotiate loans with millions of schlemiels from Cleveland to Denver to Fresno -- while the companies "servicing" these contacts are mere errand boys, with no say over the terms of anything they collect on.

So, what if these loans are not "restructured," that is, renegotiated on new terms by both parties on what is, after all, a contract? What if the government just "declares" that the current terms are void? Since the mortgage contracts have been bundled into bonds and sold off, it means that the value of the bonds is no longer what they were sold to represent. So, while a command to suspend mortgage re-sets might give comfort to schlemiels who used bad judgment in signing mortgage contracts for houses they couldn't afford, it will further impair the value of the bonds dispersed throughout the investment markets and increase disarray in the basic system of creating future credit. That is, if it worked as advertised.

But how can it work? The president said that this relief action would apply only to those who were current in their payments or no more than 60 days behind. Is it possible that a federal bureaucracy that could not even helicopter bottled water to desperate people trapped in plain sight on highway overpasses in New Orleans in 2005 can process millions of sheaves of relief applications in 60 days? Or even concoct the forms and print them?

Even if the paperwork could be designed, printed, and distributed overnight, in reality, the applications would collect in the in-boxes for decades. Meanwhile there would be no way to meaningfully establish time-based qualifications for relief. The absurd process would quickly only cast more doubt on the market value of the bonds sitting "out there" while it would create a monumental disincentive for any financial enterprise to lend money for future mortgages (or perhaps anything else). So the New Hope Alliance would have the dual effect of killing the housing "industry" and the credit markets. It could easily have a third and not inconsiderable effect of destroying the remaining credibility of the currency of the nation engaging in such obviously foolish political theatrics. And when the dollar goes, the entire global system of currencies will enter a state of dangerous instability.

These are some of the hazards of suspending law as applied to financial markets, which can only function on the basis of contract law. Once contract law goes out the window, so does the faith of parties with reserve capital in lending out capital at interest. If the interest rate can be changed arbitrarily or capriciously by third parties, then those with capital would be better off buying gold or impressionist paintings or Manhattan apartments or private armies for protecting their Hampton estates, than lending money at interest established by contract.

Anyway, this argument is academic because the Hope Now Alliance is just a political sham. The purpose of it is not to save the hapless occupants of over-leveraged houses, but first to buy a little more time so that the worker bees in the financial industry can justify awarding each other multi-million-dollar Christmas bonus packages, and second, to postpone the "workout" of all this bad investment as far into the future as possible.

Maybe all the players really know that keeping the ship afloat until Christmas is really the best they can hope for. Christmas means a lot in this country. It represents all Americans' old hope that miracles can happen. Bums turn out to be Santa Claus. Old curmudgeons are transformed overnight into loving uncles. Angels save us when we jump despairingly into icey torrents. And Goldman Sachs executives pass out multi-million-dollar checks to the wizards who "innovated" an ingenious way for the rest of their country to commit financial suicide.