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Monday, December 10, 2007

Mortgage Bailout Watch — "Religion without Hell"

Items of interest:

Dissecting mortgage bailout planAlan Reynolds / Wall Street Journal:
Dissecting the Bailout Plan -- It is not quite right to describe the new White House plan as a bailout of subprime mortgage borrowers. Actually, it is a bailout for a tiny fraction of those with adjustable-rate mortgages (ARMs), not subprime loans per se. Nearly half of all subprime mortgage rates are fixed-rate loans, and only 32% of ARMs are subprime. With all the misplaced political anxiety about rates being reset, you might imagine that all those victims who signed-up for these mortgages had no idea their rates might actually be adjusted.

The Bush administration claims the plan will help "up to" 1.2 million people. Most of that promised help consists of nothing more than another phone number to call for counseling about refinancing -- a redundant service unlikely to prove wildly popular. Refinancing has been soaring anyway, thanks to 30-year mortgage rates dipping below 6%. [...]

And what happens after five years? Presidential contender Sen. Hillary Clinton is already talking about stretching it to seven years, and that bidding war has just begun. [...]

Another president, Richard Nixon, gained ephemeral popularity by freezing wages and prices on Aug. 15, 1971, but the end result was disastrous for the economy. The Bush administration may hope now for some political benefit from freezing interest rates for a select subgroup of high-risk borrowers. But whenever politicians attempt to protect borrowers and lenders from their folly, they just encourage more folly.

Jacqueline Thorpe, Financial Post / National Post [Canada]:
Moral hazards in Bush bailout -- Capital markets without losses is like religion without hell.

Leave it to the Cato Institute to come up with an appropriate quote to bring the Bush housing bailout into perspective.

"Talk about moral hazard," says Dan Mitchell, senior fellow at the Washington-based libertarian think tank. "This is moral hazard with capital letters." [...]

The pain could be harsh but it will probably be less so than first estimates. The bailout of the S&L industry ended up costing the U.S. government US$125-billion, far less than initial estimates of half a trillion dollars at the time as prices stabilized and the economy improved.

At any rate, pain is part and parcel of the capitalist economy.
Wall Street Journal / Econ blog:
Volcker, Soros, Shiller on U.S. Mortgage Crisis -- In today’s Journal Greg Ip, Mark Whitehouse and Aaron Lucchetti examine the U.S. mortgage crisis, the economic toll of which could linger for years. The article quotes former Federal Reserve Chairman Paul Volcker, hedge-fund leader George Soros, Yale economist Robert Shiller and others. Here are some excerpts [...]
Sebastian Mallaby / Washington Post:
Paulson Behind the Curve -- Hank Paulson ranks among the Bush administration's many disappointments. When he left the top job at Goldman Sachs to take the helm at Treasury, Washington was abuzz: This man was a problem-solver; this man had clout; the president had practically begged him to accept the job, and Mr. Fix-It hadn't acquiesced just to warm a seat around the Cabinet table. But Washington can be a frustrating place. After 18 months, Paulson has made no serious impact on the issues that he cares about: entitlements, tax reform, China, trade, the environment.

Now Paulson's predicament is reversing itself. Having been prevented from acting on his chosen issues by Washington's constraints, Paulson is being forced by Washington to act on something he might rather leave alone -- the mess in the financial and real estate markets. He is being pressed into action partly because the mortgage meltdown threatens a recession and partly because the pain will be especially acute in election battleground states such as Florida and Ohio. At the end of his spell in government, Paulson's legacy will be determined by a question that he never sought to pose: When fate handed him an issue on which he was required to lead, did he lead constructively?

So far Paulson has lurched forward like a boy with his back to a fire hydrant. [...]

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