Crush Liberalism

Dubya punishes “good decision” homeowners

Bush has decided that yet another heretofore unknown role of the federal government is to bail out people who made poor financial decisions, both lenders and borrowers.  Her Highness dubs it “comprehensive work out”, and when one considers the “comprehensive” immigration plan (i.e. amnesty) that Bush wanted, we may soon come to hate the word “comprehensive” altogether.

Anywho, here’s an analysis of why the bail-out is a bad idea.  Excerpts:

The Bush administration intends to fix the subprime credit mess by keeping people who weren’t creditworthy in debt longer and rendering signed contracts meaningless.

In a pair of moves that might once have seemed too cynical even for Washington, it looks like policymakers have decided the cure for a crisis created by too much cheap credit offered too long is very simple: Extend the terms, encourage more borrowing and have someone else foot the bill.
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Have we completely lost our common sense? Is it really desirable to provide easier money to people and companies that got into trouble by abusing their access to money in the first place? And is it really a good idea both to cancel mortgage bondholders’ contracts for the sake of an adjustable-mortgage-rate freeze and to provide a couple of years of grace for stressed-out home borrowers who are likely to eventually default anyway?

I don’t think so. It’s as if the Federal Reserve and U.S. Treasury believe the best way to treat heroin addicts is through long-term, government-supplied crack. To be sure, lower interest rates and a mortgage-rate freeze might ease borrowers’ pain temporarily, but they do nothing to solve causes or habits — and without a doubt launch a new cycle of abuse and dependence.
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When banks make a lot of money, after all, they suck down the profits by giving their executives and boards outrageous pay packages worth tens of millions of dollars, justifying their actions under the rubric of entrepreneurship. And when the opposite happens? They beg taxpayers for a handout.
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That sounds nice, but here’s the catch: Rising interest rates were contractually promised to the mortgage lenders, which then passed along that promise to companies that bought the loans as part of asset-backed securities and associated derivatives.

Though the rate freeze would be awesome to a mortgage holder in Muncie, Ind., who wants to get out of his adjustable-rate obligation, it sounds terrible to a pension-fund manager in Munich who isn’t getting the income stream he paid for, as well as to the mortgage-servicing company that won’t be getting its own piece of the future income stream.

The breaking of these obligations will not be free. Foreign investors will demand a higher “risk premium” to invest in U.S. real estate, which will make it more expensive for future mortgage seekers to get loans. And they are bound to sue to get the payments they thought they were owed, which will drive up mortgage banks’ expenses.

…People who are making payments on time will naturally demand to get something out of the deal — why should they essentially suffer for being responsible? As the cost of the bailout goes up, there’s little doubt that state and federal governments will float bonds to pay the refinancing fees and, of course, interest payments on those obligations will be paid by all citizens. …

There’s more to read there, and you probably should, especially if you feel that the bailout is a good idea.

I’d like to know something: how come I can’t get an interest rate reduction?  Sure, I’ve got a fixed mortgage at a good rate, but that’s because I wasn’t stupid enough to get an ARM.  I’ve never been late on a payment, either. Shouldn’t I get rewarded for good financial decisions if people are getting rewarded for bad ones?

December 7, 2007 Posted by crushliberalism | economic ignorance | 12 Comments