SeriousBull

Resolve the crisis, why not let the taxpayer pay?

Tags: Economy + Federal Reserve + housing + Interest Rates + Markets + Mortgages + Taxes

Federal Reserve chairman Ben Bernanke once again gave a sobering speach to update us on the credit crisis. Basically he said it that delinquencies and foreclosures would continue for some time principally for three reasons: (1) there was an on-going imbalance in supply and demand for housing (2) about one and a half million Adjustable

Rate Mortgages (ARMs) are expected to reset in 2008 increasing payments to an average of $1500/mo at an average mortgage interest rate of 10%, and (3) Banks have greatly tightened lending standards and for the most part stopped sub-prime lending while new securitizations of “nonprime mortgages” have virtually halted.

After detailing steps already taken to help borrowers and mitigate foreclosures, the Chairman then proposed that banks consider writing-off as much as 50% of the principal value of a mortgage to keep from foreclosing as data on foreclosures show that the aggregate costs to foreclose, including missed payments, taxes, legal costs, and time could approach that amount on a present value basis.  In other words, the Fed was urging banks to bail out lenders to keep the additional homes off the market and as sound business judgement akin to the old adage that ‘you can’t get blood out of an turnip’ so instead recognize it and do some moral good.

By and large the credit crisis has worsened and is wrecking our economy all based on a fundamental premise that the government should not to bail out borrowers or lenders. With such a capitalistic religion (akin to we won’t raise your  taxes) politicians and government officials seek politically correct ways to solve problems doing the very thing they hypocritically oppose. Instead of taking a direct approach like stepping in between a mortgage holder and borrower to discover fraud, stop usury, and adjudicate a fair resolution, an indirect approach of appropriating funds for providing assistance, paying for counseling, increasing conventional borrowing limits through government sponsored entities, and sanctioning short sales (forgiveness of a loan by taking the property back) in lieu of foreclosure are made. Instead of intervening with the quite reasonable and effective tool of capping credit card interest rates at 12-15% to help homeowners stretched in making all their payments, Federal Funds and Discount rates are cut to enhance bank profitability to make up for losses all the while withholding passing on the benefits of lower rates to borrowers or depositors. Indeed, in an apolitical and transparent banking system the Fed would have exercised its regulatory authority to prevent the banking debacle in the first place, would require savings derived from Federal Reserve rate cuts to be passed on, and most assuredly would ask the justice department to investigate those it supervises once fraud was discovered. Imagine if we let the Enron culprits devise their own workout?  That’s precisely what is transpiring with regard to the mortgage crisis as those who failed to supervise are devising solutions suitable to themselves.

So it is no wonder the Fed Chairman reported that “lenders tell us they are reluctant to write down principal.” What is likely is that political pressure from voters will ultimately effectuate some kind of FHA or other government sponsored bailout–a kind of parity for the handout lenders received.  And in the end, the Enron bankers escape once again, the status quo remains, and all is good looking past the haze and spin having resolved problems once again with taxpayer dollars. 

March 5, 2008 - Economy, Politics