Buying Rotten Tuna

Buying Rotten Tuna

The idea of engaging in buying and selling is to invest some capital and end up with more when you are done. You buy low and sell high. Or as in the hedge funds, sell high and buy it back low. Both ways make money for the investor.

This nation undertook to make it possible for low-income people to purchase homes and begin to build wealth through ownership of that property. Owning ones dwelling afford the owner several things that renting a property does not. First, the interest on the mortgage is a tax deductible expense as is the real estate tax. When the occupant is a renter, they end up paying those expenses as part of the rent, but cannot gain the advantage of the deduction. The property owner gets that advantage.

Second, the property may increase in value over time. One is not able to take advantage of that increased value if they rent. The landlord is able to sell the property and reap the increased equity. The landlord can mortgage that equity without concern for the renter.

That brings us to the third item. The owner of the property can refinance the property and take advantage of the equity of the property without selling it or having to move elsewhere. It is a ready source of cash for a multitude of uses.

Fourth, a house is an inheritable asset. One can pass ownership down the generations so that each new generation doesn't have to start at square one each time.

People who have ample resources of education, employment, family wealth, and personal savings have an easy time of choosing and buying the house of their choice. People in that position start out discovering how much house they can afford and are able to close on the purchase of their house with little or no interference. Mortgage lenders are always happy to see them in their waiting areas.

Then there are those people who do not have those ample resources. They may be new to this country; they may have been displaced when a big local employer relocated elsewhere; they may have lived for generations in rented housing; they may not have had the opportunity to save a 10 to 20% down payment. They may have been categorized on the BASIC (Black, Asian, Spanish, Indian, Caucasian) scale as some lending institutions so cryptically embedded in their credit applications. They may have been trying to buy in neighborhoods that were Redlined as undesirable collateral. For people who were part of that population the Federal government created such institutions as FHA, HUD, and loan programs that relaxed the requirements for borrowing.

Two of the mega-mortgage institutions created were Fannie Mae and Freddie Mac. They were formed by congress and funded with public money to make it possible for people to work their way out of a dependent culture of public housing. The Federal government had a vested interest in Americans becoming tax paying home owners. Throughout the years, home mortgage legislation and funding for numerous housing Acts has made it possible for many people to realize the dream of home ownership.

Along the way, the original missions of these finance institutions became perverted to the purpose of being a money mill for shareholders. Even though the explicit purpose of the corporations was to become weaned off the federal budget and taxpayer, and eventually be self-sustaining in its ability to raise capital. To do that they needed to be responsive to investors by declaring dividends on their stock.

Fannie Mae was created in 1938 by the Roosevelt Administration as a way to assure adequate credit for a growing nation and was especially useful right after WWII. The perversion was in part orchestrated by the subsequent appointments of corporate leadership by subsequent Administrations. Most recently during the Reagan Administration economic factions loyal to the Chicago School of Economics philosophy of Laissez-faire were woven in to all sectors of the Federal government. The design was to emasculate the government in favor of private business which would take over in the created voids and be able to generate profits for the investors who would provide the capital voluntarily and with a reasonable rate of return. Taxation was not necessary in that model.

If the important functions of government were funded by private investment, having no levied taxes would make more funding available. If the economy expanded enough to pay the dividends of that investment, there was no need to ever repay the initial and continued investments. All unimportant functions of the federal government needed to be eliminated as inefficient and wasteful. Such "unimportant" functions were spending on social programs, like public education, welfare, Medicaid.

Private decisions for investment and engaging in financial transactions have historically been transacted between and among amicable willing trade partners, parties which have a mutual need, and between and among parties for whom the commerce was forced. Trade partners could pick and choose with whom they would and would not trade. Private arrangements, conspiracies and exclusionary practices were employed to the advantage of the trade partners and to the disadvantage of the others. It required a government to break down those trade barriers and to assure that everyone had the chance to engage at some level of commerce.

When investors who control the bulk of the monetary assets become spooked by current events, social upheavals and wars, they tend to clam up and protect their principle by removing it from the market. When they do this everything begins to slow down. Fear can overtake the otherwise rational decisions and collapse begins.

The Federal government acted to counteract such freeze ups during the Depression by creating the Federal National Mortgage Association - Fannie Mae. "Fannie Mae was created in 1938, under President Franklin D. Roosevelt, at a time when millions of families could not become homeowners, or risked losing their homes, for lack of a consistent supply of mortgage funds across America. [from the Fannie Mae website]"

It made sure that homeowners did not suffer wholesale foreclosures due to investors being unwilling or unable to maintain their commitments to lending the money to the home owners.

In the 1970s, the Federal Home Loan Mortgage Corporation Act fashioned Freddie Mac to draw off mortgage obligations and return the funds faster to the economy for continued growth. "Our mission forms the framework for our business lines, shapes the products we bring to market and drives the services we provide to the nation's housing and mortgage industry. Everything we do comes back to making America's mortgage markets liquid and stable and increasing opportunities for homeownership and affordable rental housing across the nation. [from the Freddie Mac website]"

Once upon a time, there was regulatory oversight of these corporations and Fannie Mae actually did pay back all of its initial 'seed money' that was provided by the American taxpayers. That was a time when actual tax revenues were able to pay for such endeavors. Today all the funds used in such programs is first borrowed from people who have it, then it is lent to intermediary banks which use it to pay off the people who invested in the previous round of investing. Surprisingly that actually that does work but only so long as the full faith and power of the US is behind the investment, i.e. the American taxpayers' ability to make good on the promise.

In times of growing markets and lucrative investing opportunities people with wealth want the government to stay out of their affairs. They want to decide when, when and how much to invest in whatever they decide is best. This would be dead normal for a human to desire. It would also be reasonable if humans were not so susceptible to emotional reactions to events that occur around the world and would not get into a frenzy when easy money seems to be floating in the water. One must remember that unless an investment actually produces something of value like a new computer chip, or a million tons of wheat, or a productive oil well, then the profits from buying and selling are derived from some other investor who sustains a loss on the same investments.

This is where that businessman in Nahant back in 1978 was so extremely prophetic. He was doing well investing in tuna boats and the catch that pulled value from the sea. He was doing quite well for himself until his business hit a glitch. With his delivery schedule interrupted, he was faced with a total loss of his investment if the tuna he owned was not sold immediately. He knew that someone who did not really understand the tuna trade could be encouraged to buy-in so he could sell-out. Ultimately he sold all of his marginal tuna and walked away without ever having to bring it in to port.

Jump ahead to the Present in 2008. President Bush, Treasury Secretary Paulson, and Fed Chairman Bernanke are out stumping to find buyers for a whole lot of Rotting Tuna. The people of the United States are being asked to buy the Tuna with the promise that they will possibly make a profit. The real outcome however, is that Americans are being asked to buy the tuna because the current owner is such a nice guy and is too important a character to have to sustain a huge loss on his tuna investments. He knew that the tuna was for buying and selling, not eating. He knew that it was a perishable item with a limited shelf life.

In the case of the real tuna on the real boat, the buyers of the tuna were doing it voluntarily even if ill advisedly. In the case of the Troubled Assets Relief Program (TARP) being batted around the committee rooms of the US Congress, the American people are being roped in and squeezed for funds to buy the rotten tuna. And since most Americans do not have the $2,300 each to chip in, they are having their futures refinanced for them and the tuna will forcibly be sold to them.

On September 29, 2008 with the Liassez-faire Republican President poised on the brink on the end of his 8-year administration, proposed the biggest intrusion by the Federal government into the private business sector. His $700 billion proposal was only conservative in that it probably was a conservative estimate of the actual sum that would ultimately be appropriated to curtail the precipitous fall of mortgaged backed securities and everyone else who had any investments that were in any way related to those mortgages. It was so big and intrusive a proposal that two-thirds of the GOP legislators voted against it. The language of the proposal was such that the Federal government would have a significant say in the workings of the financial sector. One should wonder if they who voted against the proposal did do because of the dollar amount of because of the amount of control it prescribed. That debate is for another day.

At the end of the day (September 29, 2008) the taxpayer did not buy the rotten tuna!