The signs are encouraging, but statist projects die hard...
One compromise described in drafts of the administration’s proposal would reduce the government’s role to a last line of defense for the mortgage market. A version of this idea has been advocated by David S. Scharfstein, a finance professor at Harvard who previously worked as an adviser to Mr. Geithner.No, No, No! How stupid are we?
The core of Mr. Scharfstein’s proposal is to create a new government-owned corporation for the sole purpose of providing guarantees to mortgage investors. During normal times, the insurer would guarantee no more than 10 percent of mortgages, but in times of crisis, the government could raise that cap, offering guarantees to a broader range of investors so that money continues to flow into the mortgage market and credit remains available. (NY Times - Housing)
Two quasi-government entities blow billions in taxpayer money, contributing to the housing bubble (and inevitable collapse), and the solution is to create another one? We’re intellectually bankrupt. Time for those who wrecked it all to get the hell out of the way and let some new thinking in.
This is a Pollyannaish dream to take the downside out of every market
Markets have downturns for distinct reasons, and they provide a necessary corrective. Government stepping in and short-circuiting normal market signals creates bubbles, misallocates capital, wastes money and pulls down economic growth. More insidiously, taxpayer-funded statist projects such as this allow the big bankers to keep one hand in Uncle Sam’s pocket.
A failing market needs more cash like a crackhead needs another vial
Seriously, if your brother-in-law was living riotously and careening out of control, would you loan him money? Of course not. You’d want him to clean up his act first.
How about a hard-working, sober brother-in-law who just fell on hard times? You’d be more likely to lend him money.
Markets work the same way, including mortgages and lending. Responsible people can borrow at a lower rate. People with a record of gross irresponsibility may not be able to borrow at all. Uncle Sam steps in where wise lenders fear to tread, and We The Taxpayers foot the bill when reckless borrowers default.
Would you invest in a foundering company?
Another example: Which would you more likely invest in, Apple Corporation, or a man on a street corner selling steam-powered tricycles? No contest. You put your money where you think you will get the best return.
Markets work the same way. Irresponsible behavior poses risks, investors see that and pull their money. You see it in population migrations as well. Look at Detroit. People voted with their feet and the city is shrinking. California and New York are also bleeding out productive people and businesses.
Government “backstops” are a horrible idea, because the federal government steps in when the smart money is pulling out. Bleeding out money (or people) is a market signal that you are doing something wrong and need to correct yourself. Government money subsidizes failure and masks that signal, protecting the failed enterprise from the necessary pain it needs to go through to get back on firm footing.
Government money also distorts otherwise healthy markets, driving up prices. Just look at higher education. It has grown something like five times faster than the overall economy.
A true free market produces only what consumers can afford. Government interventions inevitably end in crashes, burst bubbles, panics, unemployment and tears. One area where this is not true: Higher education. That bubble is still inflated. Hate those increasing tuition bills? Thank Uncle Sam.