Freitag, Januar 16, 2009

Smart & Stuck On Stupid...

I wish that more people would realize that being smart doesn't mean you can't do stupid things.

What we are seeing from Congress has got to qualify as the biggest CYA event since ... I can't think of any that comes nearly as close, perhaps the CYA events after 9/11.

Barney Frank wants subsidies to provide "overstretched borrowers" with cash-flow relief.

This has got to be probably the most expensive way of dealing with the subprime crisis and the one that most benefits his party. Duh on that last point.

What Frank wants is for the US taxpayers to subsidize those who, under the institutions and laws that he made possible, were able to get loans that they could never repay, with the explicit goal of keeping those folks in their houses.

Look, mistakes were made, mistakes that the Democrats are desperately trying to paper over. The mistake was concentrating on a single metric - private house ownership - while suppressing the fundamental fact that you can't have people buying houses who can't afford them. The political, as it so often does, trumped the economics of the situation, and hence the subprime was born.

Those are the facts: you can't deny them (as much as some apologists have tried and tried).

How do you deal with this problem?

Well, you can simply let those who bought houses without the means to pay for them lose their houses and have the owners of the mortgages own them. This is the simplest solution, but leaves the various real estate funds holding massive amounts of real estate that they would not have chosen to acquire (they bought the cash flow on the mortgages, not the mortgages themselves), and not a few of such funds would go tits up. This is what the bailouts are designed to avoid.

What Frank et al want is to take those poor doomed souls that made the mistake of buying something that they couldn't afford (except under the special circumstances of strong price growth allowing equity to be "created" that covered their costs) and make sure that they suffer no effects of what basically amounts to their own stupidity.

This is the most expensive way of dealing with the problem. Those mortgages are too large for the property's value, now that prices have started their downwards adjustments - and prices will continue to go downhill for quite a while yet - which means that Frank's plan will have the US taxpayer not merely subsidize the mortgages, but also an inflated value of those houses.

The only ones benefiting from this are the banks - happy to get their cash flow back on inflated values - and the tenants.

What makes it worse is that this will work against market correction of housing prices, since houses will not enter the market, reducing the supply. This doesn't change the fundamental problem of housing prices as of right now, which is that they must fall to meet demand in a day where risk considerations are back in force.

The best way to lose money is to try to support an indefensible price for something. Paying subsidies to keep prices artificially high works as long as the pockets of those paying the subsidies are deep: in this case, the Federal Government.

So what's the problem with that, you (Democrats) ask?

The problem is that this is being done not to achieve the most economical solution - which should be of paramount importance when we're talking subsidies that start to take up a significant portion of new debt (i.e. debt for consumption purposes: didn't we have some problems with that?) - but it's being done to save political careers and to prevent people from realizing that the Democratic Party, fundamentally in at least this aspect - is stuck on stupid.

It's not that they're dumb - assuming that may be what is euphemistically called a heroic assumption, but they deserve the benefit of the doubt - but much more they are desperately trying to avoid ownership of the disaster.

Let's make it clear: the subprime fiasco, the collapse of markets, the billions now probably being misspent, all happened under control of the Democrats, as part of Democratic party principles and with full knowledge of those involved.

So you can be smart, but still be stuck on stupid.

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