On the mortgage bailout
I think the dudes in Canada are right:
As much as I want to let the Bear Sterns of the world suffer the consequences of their own bad decisions, I do think that preventing a full out financial meltdown is a good thing, and that a government entity that fails to intervene to dampen the size of the swings in the boom-bust cycle shirks its responsibility to its citizens.
Some of the financial benefit that comes from the kinds of radical moves the Fed has made comes from reducing the fear in the market. Institutions stop freaking out, because they know the Fed will take care of them. Which, consistent with the perspective of the Governor of the Bank of Canada, means the institutions suddenly grow the balls required to weather the storm, and take on the risk of staying in some of their positions. It stops the downward spiral of sell-offs dropping values which trigger sell-offs which drop values. It does make the institutions willing to assume more risk, which, at least in the short term, is the goal. But I agree that government's only sharing downside risk is playing a game of "heads, I win; tails, we lose" with financial firms. Great for firms, sucks for taxpayers with no ability to participate in the firms' up side. And in the long run, makes firms likely to bet it all on Red 5, then ask the government for more chips when they lose. Not good.
I have little trouble letting the market solve the problem. I really don't think we need more lending regulation. Institutions will have gotten enough fear of crappy credit risk to tighten their criteria on their own. It would be nice to protect the financially weak and stupid from themselves with laws that make it harder for them to get loans they can't afford. But I'm not sure this should or can really be accomplished: There's always a certain amount of risk of default, which can be priced. If priced right, consumers should be allowed to place big bets on themselves, or should find the cost of doing so high enough to be a deterrent. If the risk of default is high enough, the interest rate premium ought to get high enough that the default prone won't buy it. Conversely, if a firm prices the risk wrong, and has a defaulting customer, that's the firm's fault, and the firm should suffer the consequences. You bet on Red 5. It's Black 6. Gimme your chips.
I realize the economic shock that would come when the bottom 5% of homeowners all get repossessed. All home values would take a hit, some consumer spending would take a hit. But I also expect that prices fall to the point where prudent buyers who have sat on the sidelines, not participating in the crazy inflated bubble market, not buying in with high interest, 0 money down mortgages, who've been saving to make a full 20% down payment, will enter the market. And get rewarded for making the right decision. It can't spiral down forever. We can't prolong the inevitable. It's got to unravel to the point that most of the irrationality, fear and unsustainability is out of the market. So I suppose I'm advocating that government merely try to slow, not prevent the financial meltdown. I think this is what the Fed's trying to do, but I see too much sentiment that the government should try to prevent this from happening now and in the future. There, I disagree. It's not preventable, just cushionable.
I think I'm just saying we can't have it both ways: Bad credit customers are high risk, and if we want a world in which even those who can't afford houses can buy houses anyway, we have to allow those willing to take on risk (both financial firms and consumers) to do so. If we're unwilling to live with a system which can make bad bets, and in which consumers who make bets on their own ability to pay for something can lose, then we must accept that certain people just won't have access to credit. We just can't have a world in which poor folks with unreliable incomes, no assets and a poor history of paying their bills on time can stay in houses they can't or won't pay for. Some firms must go under, and some people have to move out before we as an economy can move on.
"...
As much as I want to let the Bear Sterns of the world suffer the consequences of their own bad decisions, I do think that preventing a full out financial meltdown is a good thing, and that a government entity that fails to intervene to dampen the size of the swings in the boom-bust cycle shirks its responsibility to its citizens.
Some of the financial benefit that comes from the kinds of radical moves the Fed has made comes from reducing the fear in the market. Institutions stop freaking out, because they know the Fed will take care of them. Which, consistent with the perspective of the Governor of the Bank of Canada, means the institutions suddenly grow the balls required to weather the storm, and take on the risk of staying in some of their positions. It stops the downward spiral of sell-offs dropping values which trigger sell-offs which drop values. It does make the institutions willing to assume more risk, which, at least in the short term, is the goal. But I agree that government's only sharing downside risk is playing a game of "heads, I win; tails, we lose" with financial firms. Great for firms, sucks for taxpayers with no ability to participate in the firms' up side. And in the long run, makes firms likely to bet it all on Red 5, then ask the government for more chips when they lose. Not good.
I have little trouble letting the market solve the problem. I really don't think we need more lending regulation. Institutions will have gotten enough fear of crappy credit risk to tighten their criteria on their own. It would be nice to protect the financially weak and stupid from themselves with laws that make it harder for them to get loans they can't afford. But I'm not sure this should or can really be accomplished: There's always a certain amount of risk of default, which can be priced. If priced right, consumers should be allowed to place big bets on themselves, or should find the cost of doing so high enough to be a deterrent. If the risk of default is high enough, the interest rate premium ought to get high enough that the default prone won't buy it. Conversely, if a firm prices the risk wrong, and has a defaulting customer, that's the firm's fault, and the firm should suffer the consequences. You bet on Red 5. It's Black 6. Gimme your chips.
I realize the economic shock that would come when the bottom 5% of homeowners all get repossessed. All home values would take a hit, some consumer spending would take a hit. But I also expect that prices fall to the point where prudent buyers who have sat on the sidelines, not participating in the crazy inflated bubble market, not buying in with high interest, 0 money down mortgages, who've been saving to make a full 20% down payment, will enter the market. And get rewarded for making the right decision. It can't spiral down forever. We can't prolong the inevitable. It's got to unravel to the point that most of the irrationality, fear and unsustainability is out of the market. So I suppose I'm advocating that government merely try to slow, not prevent the financial meltdown. I think this is what the Fed's trying to do, but I see too much sentiment that the government should try to prevent this from happening now and in the future. There, I disagree. It's not preventable, just cushionable.
I think I'm just saying we can't have it both ways: Bad credit customers are high risk, and if we want a world in which even those who can't afford houses can buy houses anyway, we have to allow those willing to take on risk (both financial firms and consumers) to do so. If we're unwilling to live with a system which can make bad bets, and in which consumers who make bets on their own ability to pay for something can lose, then we must accept that certain people just won't have access to credit. We just can't have a world in which poor folks with unreliable incomes, no assets and a poor history of paying their bills on time can stay in houses they can't or won't pay for. Some firms must go under, and some people have to move out before we as an economy can move on.
posted by Kenneth at 11:34 AM
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