We’re from the Government, and We’re Here to Help You Buy a House

There has been some good analysis of this week’s much-hyped agreement between the U.S. Treasury Department – which facilitated the meeting, we are told, but didn’t use any form of coercion – and mortgage lenders to bail out assist homeowners in danger of being slammed with a much higher monthly payment on their subprime mortgage come January. But there are some elements of the deal that haven’t been greeted with much skepticism – or, indeed, haven’t been reported much at all.

When the market started to melt down a few weeks ago one firm released a statement about their multi-billion dollar write off to the affect: “In the financial field you have to make calculated risks… and this time we lost.” It infuriated me. These people knew damn well that what they were doing was extremely risky and there was a very high chance of failure. As the first article cited in the above there are NINJA loans. Now while that may sound really cool (unless you are a pirate supporter) it’s really an amazingly stupid business transaction. NINJA stands for “No Income, No Job or Assets.” A hobo who’d taken a shower could have gotten a loan for a few hundred thousand dollars and the lender wouldn’t have bothered to even check if any of the info provided was accurate. Why would these otherwise reasonable businesses take such great risk?

Because of the corporate nanny state. For nearly 100 years the Federal Reserve has been the lender of last resort, the link between government debt and the banking system and the controller of interest rates. These all distort the market and redistribute wealth. Wall Street knew that all these risks could ultimately be pawned off. Sure they may take a hit but by lowering interest rates and inflating the money supply the contraction and resulting deflation that should be happening… and needs to happen… will be pushed out into the future. Perhaps the biggest issue here is the obviousness of the corporate bailout. This can only add to the existing deflated risk by allowing investors to believe the government will so easily provide a way out when they dig themselves a hole. Reminds me of the suspension of specie payments enacted by the federal government throughout our history. The banks didn’t have the specie on hand to cover the redemption requests so the government allowed for the redemption contract that is a paper bank note to be postponed.

So now we have this secondary bailout. This time by the federal government on behalf of those debtors who are at risk of defaulting on their loan. While they claim it won’t cost tax payers money… this CATO article shows how that could change. Worse than that however is that the government will now be seen by the public as the great protector when they make poor investments in housing too. It creates a moral hazard and will only lead to more bad investments and dependency. Also the stepping in to request contracts be rewritten is an affront to contract law. Down the road this disrespect will only worsen. This nanny state response will be thrown on the stack of other ’safety nets’ like SSI, Medicare, etc. and become an expected role of government. Seems to me the next step is more explicit government  subsidies for the average individual looking to own a home and after that government granted or guaranteed homes.

Looks like I’m not the only one who thinks this is a bad idea. Also Dick Army of FreedomWorks can be seen arguing Hillary Clinton’s plan on CNBC.

While I have money invested in the market and would rather not lose a large chunk of it to this adjustment, it needs to happen. We have a couple hundred years of evidence showing how the distortion of the market creates these problems and more government interference almost always results in more.  When will they learn? Perhaps Rothbard’s A History of Money and Banking in the United States should be required reading for members of our government.