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But the Invisible Hand Is Blind, Too

February 20th, 2009 . by economistmom

I’m traveling and so haven’t had much time (nor the internet connection) to study the Administration’s plan for the mortgage crisis, but I did catch the President’s remarks in Arizona and am just wondering how it’s possible that their plan can really do this:

And we will pursue the housing plan I’m outlining today.  And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages so they can afford — avoid foreclosure.  And we’re not just helping homeowners at risk of falling over the edge; we’re preventing their neighbors from being pulled over that edge, too — as defaults and foreclosures contribute to sinking home values, and failing local businesses, and lost jobs.

But I want to be very clear about what this plan will not do:  It will not rescue the unscrupulous or irresponsible by throwing good taxpayer money after bad loans.  It will not help speculators — (applause) — it will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell.  (Applause.)  It will not help dishonest lenders who acted irresponsibly, distorting the facts — (applause)  — distorting the facts and dismissing the fine print at the expense of buyers who didn’t know better.  And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.  (Applause.)  So I just want to make this clear:  This plan will not save every home. 

I mean, when the government intervenes (subsidizes), but doesn’t outright take over, a market, how can they know how much the suppliers vs. the buyers will benefit, and how much bad suppliers vs. good suppliers, or bad buyers vs. good buyers, will benefit? 

7 Responses to “But the Invisible Hand Is Blind, Too”

  1. comment number 1 by: Brooks

    If the government (i.e., the taxpayers) is going to “help” (i.e., borrow and give money to) some homeowners with their mortgages (directly or indirectly), shouldn’t the taxpayers get some equity in those homes, in the interest of fairness and preservation of proper incentives regarding “moral hazard”?

  2. comment number 2 by: Unsympathetic

    Unless each and every loan is re-underwritten and this “aid” is only given to families that had LESS than 38% total back-end obligations at the START of the loan, this bill is a failure.

    If the family was paying out greater than 38% of their income, the housing loan was only given with the assumption of future price appreciation.. and therefore foreclosure should, in fact, occur.

    It’s best if we find the bottom immediately rather than simply attempting to prevent economic reality from intruding upon happy thoughts.

    As written, the plan was appropriately analyzed by Santelli yesterday on CNBC. I’m already making plans to attend his protest on 4/15.. I hope you’ll be there too.

  3. comment number 3 by: Hmmmmm

    Approve the cramdown legislation. it’s the only way to make it work.

    The banks approved loans they should not have been making, so a judge should have the authority to fix the problem.

    It’s still cheaper to the bank than an actual foreclocure.

  4. comment number 4 by: bncthor

    Brooks ….”shouldn’t the taxpayers get some equity in those homes…”

    The problem is that the bulk of such homes/home owners have very little or even negative equity as average housing prices have declined significantly. The widespread decline in housing prices has exacerbated the general economic recession now gripping the economy.

  5. comment number 5 by: Brooks

    bncthor,

    I realize that, but it seems to me that there is an asset there (the home) and the government (i.e., the taxpayers) are providing money to, in effect, the homeowner (or perhaps the bank and/or some other entity) who has (or will end up) ownership of (equity in) that asset, so why shouldn’t the government (the taxpayers) own a piece of that home (i.e., get equity) that can later be sold to recoup part or all of that “investment” from the homeowner or from whomever ends up with that asset?

  6. comment number 6 by: e-veblen

    Writing down the principals on the troubled loans is key, not extending the payment stream. As far as I can tell, the only part of the plan that broaches that is the proposed changes in bankruptcy laws to bring mortgages on primary residences under review.

  7. comment number 7 by: Unsympathetic

    No institution can handle the write-downs that cramdowns to sale price would create. Foreclosed homes totalled over $100M in nominal value in California in January 2009 alone. That’s one month in one state — it is mathematically impossible to simply assert that cramdowns “will” work. Yes, banks messed up horrifically bad — but you need to realize the extent of the problem! Banks are fundamentally insolvent and we need to determine how to unwind this, not throw around invective.

    The problem is that the assets on bank books reflecting mortgage payment streams are valued at 5c/dollar (at most) by PE shops like JC Flowers. Banks don’t like this valuation b/c it makes them very insolvent. Because of this, I believe all the large banks need to be nationalized. Small banks are doing fine - they can step up in size, it’s happened before in American history.

    Furthermore, why should the 15% of homeowners who have negative equity be subsidized by the rest of the productive population?