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Good Money After Bad By: John R. Lott Jr.
FrontPageMagazine.com | Monday, February 23, 2009

Would you lend $1.66 million dollars on a house that was worth $100,000? You wouldn’t even take the idea seriously. Bankers would laugh at someone asking for such a loan, and they should.

To make the example even more ridiculous, suppose that the home owner has a negative income - a negative income of $2.3 million last year. That the home owner is expected to lose a lot more money over the next couple of years, and that even if things work perfectly, he might simply stop losing money after 2011. That he lives in a bad neighborhood where almost all his neighbors are in similar in shape.

Even if you had already lent $1.3 million, you would run away from this borrower and simply chalk up the $1.3 million to some temporary insanity.

Well, multiply those numbers by 10,000, and you have the loan situation facing GM. GM is worth only $1 billion, it lost $23 billion, and it wants a loan of $16.6 billion. It may seem small compared to the $5.6 trillion in obligations that the stimulus and bailout are piling up this year, but we are talking about real money here.

President Bush wasn’t thrilled to lend GM the money last December, but Obama and Democratic Congressional leaders wanted the company to remain out of bankruptcy until Obama became president.

So what do the Democrats now say about this new request for money?

Democratic House Speaker Nancy Pelosi said on Wednesday that the money will lead to the “transformation of our domestic automobile industry into a viable, technologically advanced, and globally competitive manufacturing force.”

Of course, this is on top of many billions in direct aid to automakers and Michigan in the so-called “stimulus” package that Obama just signed on Tuesday.

Pelosi may claim that the Democrats are “ensuring accountability to the taxpayers,” but the only way to do that is to walk away from this money pit now. If Obama and Pelosi would never loan money to our hypothetical homeowner in this condition, they shouldn’t throw the taxpayers’ money down that hole either.

John R. Lott Jr. is a resident scholar at the American Enterprise Institute.

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