Thursday, February 28, 2008



In an interview with The Wall Street Journal on the housing market yesterday, Treasury Secretary Hank Paulson said the following:

“I’m seeing a series of ideas suggesting major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully, what they really amount to is a bailout for financial institutions or Wall Street.”

Mr. Paulson was close to being right in this utterance; the reason that he was not completely right is discussed more thoroughly below. What is especially salient in Mr. Paulson’s statement is not that he was not completely right but rather that he displays the malady endemic to Republicans: saying the right thing and then doing the near opposite. What Mr. Paulson has consistently presented since the onset of the “housing crisis,” after initially echoing his Wall Street and Administration colleagues’ contention that it was nothing to worry about, an isolated incident that could easily be handled by the wunderkinds on the Street, is a series of schemes that involve Washington intervening in the market without completely losing its virginity: knocking heads in order to get financial institutions to go along with schemes to exonerate overextended homeowners and, by extension, foolish traders and investors, effectively forcing banks into a (now failed, thank God) super-conduit to bail clueless banks out of yet another idiotic foray into areas of the market they created but did not understand, cheering on Obsequious Ben as he doggedly pursues a policy of debasing the dollar and igniting inflation in order to provide sucre to Wall Street free marketeer tough guys, etc. Indeed, in the same interview in which he uttered the above free market pieties, Mr. Paulson cited the good work, and his involvement in fostering, the Hope Now alliance that cajoles lenders into various Rube Goldberg refinancing schemes. He also said he “planned to keep the pressure on mortgage servicers to cut a deal with homeowners who are current on their payments but might slip into delinquency if rates were to jump.” He further said that he would “press the (financial) industry to expand the program to reach borrowers struggling with prime-rate and other mortgages.” (I quote the article, not Mr. Paulson.) So, clearly, Mr. Paulson talks a free market game while pursuing just another form of market intervention, as do all but a few Republicans.

As I said above, not even Mr. Paulson’s quote cited above is entirely accurate. Even if the programs he is pressuring (forcing, really) financial institutions to participate in were limited to “helping homeowners stay in their homes,” that would not make them desirable. Mr. Paulson and his co-enablers on the Democratic side talk as if it is always a good thing to keep people in their homes and that their “solution” is not designed to help speculators and/or Wall Street. However, amateur and professional real estate speculators, while a large contributor to our difficulties, are not the major source of the housing problem. The major source of the problem is addle-brained “homeowners” who simply bought more house than they could afford or borrowed against their already heavily mortgaged homes and are now looking for a bailout from people on whom they would normally look down their noses. (In fact, a cynic (realist) might argue that one of the major motivations for these people’s buying more homes than they could afford was that it would give them justification for looking down their noses at the people they are currently begging for a handout, but that is grist for past and future posts.) Why should these people be protected? Why should financial foolishness be rewarded and encouraged? If someone bought too much house and/or borrowed against his house in order to achieve or maintain a “lifestyle” (another one of those namby-pamby words that clear thinkers despise) that was beyond his reach and/or is suddenly surprised by a (clearly stated in the contract) rate readjustment or a decline in the price of their home (which these geniuses assured people like yours truly could never happen), that is his, and his lender’s, problem. If they can, and wish to, negotiate some kind of solution, that is great; that is how a free market, with freedom to contract, is supposed to work. But no one should force either of the parties into a financial arrangement. And responsible taxpayers should not be forced to subsidize irresponsible home buyers. That is not only anathema to the free enterprise system, it is morally wrong.

The largest problem with Mr. Paulson’s plans is not that they are the equivalent of financial heavy petting or that his perception of what the government can or should do is still skewed in favor of activism. The biggest problem is that one gets the nagging notion that something bigger and that involves direct taxpayer subsidies is on the way. (See my 1/25/08 and 1/17/08 posts.) It might be something the full effect of which will not be felt until long after George Bush is back in Texas and Hank Paulson is back in New York, but a scheme under which the financially prudent will bail out the financially feckless is on its way.

In fairness to Mr. Paulson and to the Administration, at least they are paying verbal homage to free markets, delaying a full scale taxpayer bailout of the financially foolish (perhaps for political reasons), and at least trying to appear virtuous.. The Democrats want to jump right in the sack and get it done. Barney Frank (D., Mass.) want to use $10 billion of your money to, in most cases, keep people in homes you and I could only dream of. He also wants the FHA, originally designed to (not, as you might understandably suspect, destroy neighborhoods on the south side of Chicago in the ‘60s, but, I digress) help lower income people buy homes, guarantee mortgages in amounts approaching $750,000. Senator Barack Obama (D., the campaign trail), wants to use your money to create a $10 billion fund to help overextended homeowners refinance (as if the overextension was somehow forced upon these big spenders) and to (get this) help people buy first homes, thus putting more people who can’t afford homes into homes they can’t afford. The other senator from the campaign trail, Hillary Clinton, has a plan that is even more fecund of future folly: she wants to declare a 90 day moratorium on foreclosures, which punishes the formerly admirable actions of homeowners who struggled, scraped, and denied themselves in order to avoid foreclosure while rewarding those who just had to have the new BMW and the vacation in Maui while denying lenders the foreclosure option that enabled them to make relatively low cost loans in the first place, and to impose a five year interest rate freeze on ARMs. This will reward those who couldn’t be bothered to read their mortgage contracts (apparently too busy either for self-government (See my 2/26/08 post.) or for managing their own finances; those gormless situation comedies take up lots of time, you know) and completely destroy banks’ incentive to provide adjustable rate mortgages. Great idea.

All of these programs, whether from proudly interventionist Democrats or sneakily interventionist Republicans, have one thing in common: They use the heavy hand of government to “solve” a problem that cannot be solved by government, and will exacerbate the problems we will face in the future. But, hey, it’s not the pols’ money and there is a good chance that these estimables will be out of office when the product of defecation really hits the climate management device. The “mortgage crisis” will only be solved through the market finding its own level and by private parties’ working out their own means of mitigating their mutual financial difficulties without the government either holding a cudgel over their heads or handing them large sums of money in order to reward them for their mendacious and/or purblind financial behavior.

And if the market is allowed to play out, if people are not saved from the consequences of their financial irresponsibility and arrogant, misguided approach to investing, there is a chance that Americans will learn to live within their financial means and that the financial “pros” will actually learn to think before investing other people’s money. If the government “rides to the rescue,” we will merely continue on our self-destructive path to financial and societal doom.

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