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"I hope the titans of finance who expect us little people to save them are ashamed of themselves. But at the same time, in painting Main Street solely as a victim of a rapacious Wall Street, we are being hypocritical. We are all to blame."

~ Bethany McLean, "The Borrowers," The New York Times, October 2, 2008

In a sense, the former Fortune investigative reporter of Enron whistleblower fame has a point. It takes two to tango. The borrower was a willing dance partner to the lender’s lead. As the music kept playing, the dance floor became crowded and unruly. Many felt the party would never end. Some, like Citigroup’s Chuck Prince, thought they could quietly sneak out the back door before the cops arrived. Others — soccer moms, retirees, and avid readers of LewRockwell.com — knew better and dropped their invitations in the shredder. A significant portion of the population acted responsibly.

We wrote about this dichotomy in June, 2006, less than a year after the housing boom peaked:

"A long-time friend… points out a distinction in the behavior of the debtor class. Some have clearly acted responsibly: they consolidated their debts into tax deductible mortgages, locked in the lowest long-term rates in 40 years, and tossed the interest savings into their rainy day and investment jars. From a consumption standpoint, little has changed except that these old-school borrowers pocketed a windfall compliments of their friendly neighborhood central banker. Others — to put it mildly — have gotten carried away."

At the time, we reported 29% of the mortgages taken on in 2005 were already underwater. Housing costs consumed over half the income of 16% of those with mortgages, up from just 2% five years earlier. What we failed to mention were that roughly half of all mortgages fell within long-held standard payment limits of 30% of gross income and that 18% of all homes were owned outright.

Scratch the surface and you’ll find plenty of people who resisted temptation during the bubble years and lived within their means. My sister and her husband who live in Harrisburg, Pennsylvania occupy the same home they bought in 1991. In 1998 they refinanced at a lower interest rate and increased their mortgage to pay for a significant extension of their house (my brother-in-law actually did most of the work). After the home improvement loan, their loan-to-value went up to approximately 55%. At the time their mortgage was about 14% of total gross income, 16% with taxes. The bubble from 2001 to 2006 largely passed them by. They failed to get the memo about using their house as an ATM, choosing instead to save before making major purchases (e.g., they began saving two years for a recent trip to Wyoming). They have no credit card debt. Today they have four years remaining on their mortgage. Total payments are 13% of gross income and their current LTV is about 15%.

This is not to say my sister and her family will not suffer from the madness of others the last seven years. Her husband works for a specialty paper company which outsourced two-thirds of the local jobs to South Carolina a few years ago. The current hangover from our housing, credit, and consumption bender does not exactly help his job security. My sister’s family is also being forced to help bear the costs of a $1 trillion 5-year war, some of which shows up at the grocery store and gas pump. Now they’re being asked to pick up the tab for a party they never attended, with the cleanup bill already over $1 trillion. As you might expect, they are not exactly pleased by this prospect.

Government has no resources of its own, no elves working overtime to produce something of value, just promoters who espouse Santa Clause economics. It can only transfer wealth from one group to another (skimming a nominal transaction fee in the process). The current $700 $800 billion bailout (sorry, rescue) package is nothing more than a looting of the responsible and productive by the reckless and profligate. Call it reverse Darwinism, survival of the least fit. As the old economics saw goes, subsidize a certain behavior and you get more of it, tax a certain behavior and get less. Responsible people like my sister and her husband are becoming an endangered species in this country as a result.

Expect such a massive wealth transfer at the hands of the political class to be means tested. Those who were reckless, but friendless in Washington and have already paid a heavy price for their sins will go to the back of the soup line. Paulson’s checkbook will not be used to help Joe Sixpack who got in a little over his head or save Lehman Brothers shareholders who bled to death before the triage unit showed up. It will be closed to smaller banks not privy to high-level discussions about which Fannie Mae creditors the government would bail out and are now stuck with worthless preferred stock. What will Paulson likely tell pension funds holding the very same toxic paper as his "too big to fail" banking cronies? Take a number.

Stripped of its lofty promises, the Emergency Economic Stabilization Act of 2008 will not backstop your 401(k), encourage lenders to crawl out of their bunker, resuscitate an economy on life support, or turn a profit for the hapless taxpayer. Its primary mission in life is to rescue "the Chosen Ones" — Goldman Sachs, Morgan Stanley, Citigroup, Bank of America, and JPMorgan Chase. The early returns are promising. On Thursday, September 18, the financial establishment was coming unhinged. By early afternoon the combined market values of the five companies had shriveled to $360 billion. That night DC’s power brokers — Paulson, Bernanke, Cox, Pelosi, Frank, et al. — concocted their shameless scheme. As of last Friday’s close, the Chosen Ones tacked on $137 billion in market value for a 38% gain while the rest of the market, as measured by the Dow Jones Wilshire 5000 Index, lost $634 billion, or 5.6%. Market participants are not always rational, but in this case they apparently figure a blank check in the hands of a former CEO of Goldman Sachs will benefit the political economy at the expense of the real economy. Our sense is that both are in trouble; transferring more blood from the productive host to the parasite does not in the long run make either healthier. For the economy and country to begin healing we need capital, credibility, and responsibility to move from the wasteful to the productive. The power elite, predictably, is attempting to achieve the exact opposite.

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