Love of Liberty : housing

Free Market to Blame For The Mortgage Crisis?

ChrisR — Sun, 23 Dec 2007 04:56:00 GMT

I knew it would only be a matter of time before I would read that the free market is to blame for the current housing bust. Below is an excerpt from a letter to the editor of the New York Times:

Its cause is the rigid, unrealistic ideology of the “magic of the free market” — with its doctrinaire aversion to almost any regulation of our financial systems.
This ideology is also the underlying reason that Alan Greenspan, when he was chairman of the Federal Reserve, refused to take any action even when knowledgeable experts repeatedly warned him about an out-of-control mortgage market.

I think the Times reader who wrote the letter has a couple of things confused:

First of all, the free market cannot be blamed for the mortgage crisis because the free market was not allowed to function. The artificially low interest rates were set by the Federal Reserve. In a free market, interest rates would have naturally risen, thus thwarting the possibility of a massive malinvestment in housing.

Second, Alan Greenspan was in no way being guided by the free market ideology. His job as Fed Chairman prohibits it. If a person fixes the price of anything (interest rates included) he is thereby not allowing the free market to function.

Finally, there is no "magic" to the free market. On the contrary, "magic" would be if wealth really could be created by printing money out of thin air.

Paulson's Plan

ChrisR — Wed, 05 Dec 2007 19:20:00 GMT

Here is an article written by Michael Pento via the Financial Sense website.

Below are some highlights from the article:

The essence of his plan is to convince the owners of sub-prime adjustable mortgage debt to freeze the interest rate resets for a period of about five years, a proposal which is supposedly only to be available to those who will become indigent once the higher rates become effective...
Offering to freeze the rate for only those who cannot afford higher rates is silly and we will certainly see claims of indigence from many who can actually pay...Just read this article on the amount of fraudulent Katrina aid relief claims...

Most importantly, Paulson's anti-capitalist plan serves to reward those who behaved irresponsibly and punish those who lived within their means.

In my opinion, this also sets up a "moral hazard" for the future. Incentives for being prudent and self-responsible are further eroded.

Operation Hope

ChrisR — Mon, 03 Dec 2007 22:15:00 GMT

Austrian economists are usually the only ones who advocate against government intervention once a bubble has burst.

Jim Sinclair of jsmineset.com wrote a short post on the proposed intervention called "Operation Hope." He correctly points out that:

Project Hope will not, cannot and should not try to cure a problem that simply must work its painful self through the economy which is the only true economic process of sorting out bad debt.

Further intervention will only cause further distortions. Looks like that's exactly what we're headed for.