Friday, September 07, 2007

Warning: Unintended Consquences Around the Bend with Mortgage Bailouts

Via ReasonOnline:
Bailout or Handout?
Government should not screw up the real estate correction

You can tell the feds are bailing out mortgage lenders by the way no one wants to call it a bailout.

President George Bush made that clear last week when he announced his plan to rescue broke borrowers. "A federal bailout of lenders would only encourage a recurrence of the problem," Bush explained.

So this is not a bailout, you see, because it is for the borrowers, not the lenders. And if you believe that, then you'll also believe that the Federal Reserve has been shoving money at the banks by the billions in recent weeks in order to help borrowers, too.
In truth, what Bush has proposed is far worse than a bailout. Federal regulators and policies would supplant market discipline and price signals in the mortgage market. And all because a long-overdue correction in the domestic mortgage-making sector manifested itself this summer.

What is happening with real estate lending now is not unlike the dot-com bust. America survived that bubble. Then, as now, actual income-production became secondary to complicated financial constructs which obscured the underlying business. If there ever was a business. Recall that Enron invented entire energy-trading markets that ultimately dealt in nothing...

...In sum, we have the makings of the financial equivalent of Medicare Part D—a massive federal program in the place of a semi-private sector that more or less works. Not perfectly, but it is better than making Washington largely responsible for credit allocation in America....


Blogger Luke said...

I really hope that this "bailout" does not happen. It is the combined fault of over zealous, risk taking lenders AND overly greedy, irresponsible borrowers.

My Take Here

September 7, 2007 at 12:57 PM  

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