Thursday, September 18, 2008

Bailing everybody out

I think the 1970’s were underrated. As the monetary authorities pump billions and billions into the market in an attempt to prop up the deflating bubble the end result will be a general rise in prices. It’s back to stagflation!

Of course they could have done something else. They could have let markets crash and allow house and other prices (securities, etc) find the appropriate free market level. But that, of course, would have been painful and caused a serious recession, if not a new Depression.

Another idea, made easier by the take over of Fannie and Freddie, would have been to restructure the 75% of mortgages they own, giving every one of them a haircut of 20%, a new fixed 5% rate of interest and a one-year payment holiday. In exchange homeowners would be on the hook to repay that 20% if they eventually sell at a profit.

For the holders of the mortgage-backed securities, call all of the bonds, pay cash today with a 30% haircut to the face. These folks would suddenly be flush with cash, have all the uncertainty of those securities removed, and would be off to the races.

On paper the government comes out ahead, the markets are allowed to clear, home-debtors get a break, and everyone is happy.

But no, instead of tackling one of the biggest problems with the markets today, they just throw money at it.

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