Arnold Kling  

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The New York Times has a story about borrowers who worry that they are hurting themselves by paying their mortgages and perhaps missing out on a bailout.


"If the government says, 'Prove that you can't afford your house and we'll redo your mortgage,' then people are going to try to qualify," Mr. Schiff said.

In that situation, those who will benefit the most are the ones who, unlike Mr. Lawrence, spent far beyond their means -- who refinanced their houses and used the cash to buy toys and lavish vacations, or sometimes just to pay the bills.

I am still waiting for profiles of borrowers that make me think they deserve a bailout. That is the dog that has not barked in the news coverage of the crisis.

Steven Pearlstein writes,


making modest investments in dozens of banks, whether they needed it or not, produces little for the public beyond the small profit for the Treasury. What it does do, however, is open the door for every politician and populist to second-guess every decision and expenditure the banks make, based on the false assumption that everything they do is with "our money."

Pearlstein prefers the original Paulson plan, to buy mortgage securities. On that, I disagree with him, but read the whole column. To me, what is amazing is that Paulson spent $1000 per American household, with none of our permission, and so far Pearlstein is the only one complaining. At one point will people wake up to the fact that transferring more power to Washington is not the answer?

Finally, Russ Roberts writes,


By acting without rhyme or reason, politicians have destroyed the rules of the game. There is no reason to invest, no reason to take risk, no reason to be prudent, no reason to look for buyers if your firm is failing. Everything is up in the air and as a result, the only prudent policy is to wait and see what the government will do next.

Exactly. The private sector is like the victim of a snake that spits venom that causes paralysis. The snake is the government that is "here to help." Read the whole column.


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COMMENTS (4 to date)
shayne writes:

Thank you for the links.

The Russ Roberts article (and especially the passage you extracted) seem exactly on point. (I owe Dr. Roberts a kudo or two, as I was rather critical of him on a previous post).

What baffles me is the initial and on-going references to the '29-'41 depression. Other than current government/Fed actions that are "without rhyme or reason", there are almost no similarities to that period. In the depression era, an over-leveraged stock market crash precipitated a recession, and subsequent ill-advised consumer/bank/government actions precipitated a recession into a depression - as Dr. Roberts describes.

In the current case, an over-leveraged housing market precipitated a credit market 'clog'. But housing has an intrinsic value that the 1929 stock market components didn't. That at least implies that home prices, while deflating/deflationary, will not go to zero value as 1929 stocks did. And at least some of the banking protections put in place after the depression era are/were intact at the beginnings of this mess. Not to mention the fact that it has taken until the 3rd quarter of 2008 for the economy to show a (trivial) negative growth, when the housing 'bubble' burst was in late 2006.

It's as if the elected representatives and the Fed are feeding a basically healthy patient massive doses of digitalis in the hopes of staving off a mis-diagnosed massive heart attack. Such remedies cause heart attacks.

Caliban Darklock writes:

"I am still waiting for profiles of borrowers that make me think they deserve a bailout."

Is such a profile possible?

I am renting, not because Bad Things happened, but because when I asked for a mortgage that didn't provide massive risk later down the line... nobody would give me one. Rather than accept the risk, I chose to wait until the market corrected itself. We're probably another year or two away from that.

But didn't everyone who chose not to wait voluntarily accept that risk? Having accepted it, don't they "deserve" what they got? They knew it could happen, they decided to risk it, and it happened. It was a voluntary gamble, wasn't it, just like plopping your whole paycheck onto the roulette table? No matter how stupid it was, isn't it the entire point of American self-reliance that the consequences of stupid actions are yours to accept and resolve?

Marc Resnick writes:

If there were no systemic effects, then no one should get a bailout because of what Caliban well states in his comment. But if we have to bail some people/companies out to repair systemic failures, then we have a problem. The people/companies that provide the most leverage in repairing the system are not the most "deserving." So do we then bail out people who "deserve" it more also, as a measure of fairness, even though this provides no systemic benefit and just makes the bailout more fiscally irresponsible?

What are the key goals and in what proportions? Fixing the system, being fair, minimizing future moral hazard, and/or fiscal responsibility?

Frank writes:

That at least implies that home prices, while deflating/deflationary, will not go to zero value as 1929 stocks did. And at least some of the banking protections put in place after the depression era are/were intact at the beginnings of this mess.

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