Friday, February 01, 2008

How to Solve the Housing Crisis?

The Department of Labor reported that the economy lost a net of 17,000 jobs last month. This is the first time the economy has shed jobs in 52 months and makes a recession look more likely in the coming months. Politicians are scrambling to formulate a response. Below I've attempted to distinguish the responses put forth by various factions. Let me know if I've left anything out.

Liberal response:
Somehow "freeze" interest rates and give direct federal assistance to those who've been foreclosed upon. Prosecute "unscrupulous" lenders who made loans they shouldn't have and prevent them from making such loans in the future. Require lenders to provide additional disclosure documents to borrowers. Extend unemployment benefits for those out of work and increase foodstamps. Rollback the Bush tax cuts for those making over $200,000 and provide immediate relief to middle and lower income families because, unlike the rich, "they actually need it."

Bush Administration response:
Send everybody rich and poor $1600 and hope new consumer spending will somehow "stave off" a recession. We're all Keynsians now so let's prime the pump and party like it's 1973.

Conservative response: Do nothing. Allow lenders and borrowers to take the hits they deserve for making bad investment decisions as this will prevent them from making these same mistakes again when the Fed fuels its next unsustainable boom. "Freezing" interest rates would have disastrous unintended consequences: all lending would cease because banks would have no incentive to lend money at rates below what the actual supply of savings and risks involved are. It would also signal that the U.S. is willing to undermine that basic tenants of contract law just for political expediency. Stimulus packages and more federal intervention would only serve to further distort and prolong the miscalculations that brought about the recession in the first place. A correction in housing is inevitable and necessary in order for the economy to recover and for the market to return itself to equilibrium. Unprofitable investments must be liquidated so capital can be reallocated into sectors that are truly profitable. Handouts, rate freezes, and rebate checks will only delay this process.

2 comments:

Joe said...

The whole idea that the current mortgage crisis was somehow caused by "predatory lending" is laughable. I can only speak for the strictly banking side of this argument, but your mortgage generation companies will generally operate in the same manner.

Banks cannot make money on bad loans. Foreclosure is the last thing a bank wants to do. First, it's damn expensive. With everything that must be done to take someone's home, the legal fees are astronomical. Second, once the home is foreclosed upon, then the bank has to sell it to recoup the loss incurred from the loan, which costs even more money.

No one wins with foreclosure, so why does it go this far? By and large, banks proceed with foreclosure because the borrower has broken contact with their lending officer. This leaves no opportunity for a plan to work out of the loan with a refinance or some other measure until the home is sold. If the borrower maintains contact with the lending officer, forclosure is unlikely.

HANK said...

The Communist and Liberals, I mean Democrats and most Rebublicans bemoan "predator lending."

Why don't these same people point out "predator borrowing?"
The housing boom was partly fueled by borrowers deceiving loan officers into qualifying them for mortgages they later foreclosed on. The government should let these sonsabitches suffer as well.

When living in a nanny state like we're heading towards, if a barefoot and pregnant woman with five children with 4-6 different daddys (yeah, the mother may be confused about who child #5's baby-daddy is) makes a financial boo-boo, Uncle Sam will be there with a helping hand of cash.