Monday, August 27, 2007

Credit panic and foreclosure bailouts

Brilliant “bright” ideas on how to prevent a looming financial crisis are raining from everywhere. Just in the past few days, the following proposals have been all over the news.

PIMCO’s Bill Gross urged the White House to bail out troubled home owners: “If we can bail out Chrysler, why can’t we support the American homeowner?” I would say that the Chrysler bailout wasn’t a very good idea either, but then the government had its own reasons for it. In my opinion, it would be totally unfair to pay for borrowers’ unsound financial decisions with other taxpayers’ money. According to this blog entry, it turns out Mr. Gross himself is heavily invested in mortgages and further foreclosures would sting him quite badly. So that’s why we need to bail out borrowers.

Another brilliant plan comes from presidential candidate Senator Christopher Dodd (D-Conn). What he suggests is, to allow the Federal Housing Administration (a.k.a. FHA) to refinance troubled loans. He believes that the FHA does not serve its purpose well and needs to be reformed is order to be able to help homeowners-to-be. Dodd suddenly appeared among those “concerned” about housing several months ago, and started criticizing the government and the existing system, proposing some rather dubious solutions. Dodd also supported the idea to lift the investment caps on Fannie Mae and Freddie Mac’s portfolio, a move that would allow an inflow of financing on the market. The idea was rejected.

I really wish all these activists were this creative a couple of years ago and invented an economically sound way of “saving the economy”. Unfortunately, right now we are indeed facing serious problems that need to be solved, and every solution seems to have “unwanted side effects” for the economy, the dollar, or the average consumer. Every foreclosure is a particular family’s tragedy, but many of the loans defaulting now should have never been made, and those who were involved in the process only have themselves to blame. It is true that the entire business was infested with fraudulent activity, but in the end everyone had a choice. Sadly, greed often prevailed.

Meanwhile, the Fed has some “bright” ideas of its own. According to CNN, the central bank has temporarily exempted Citigroup and Bank of America from limitations on the amount of money they can lend. So this is more of the same – a move to artificially boost cash flow in a market that is essentially stagnant. Sounds good for a short-term solution, but in the end market forces should be allowed to play their part in the whole thing.

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