Video Meliora, proboque; Deteriora sequor

More Bailout

Seems I was under the mistaken impression that the options last week were limited to only two: to let everything fail, or to pass the Paulson plan. (Of course politically-speaking, maybe those were the only alternatives?) Warren Coats writes:

If the intent is really to restore liquidity to MBSs rather than to raise their value and thus the capital of those institutions holding them, the scheme is unnecessary because the Federal Reserve can lend banks any amount against these MBSs as collateral and has already introduced new lending facilities with longer maturities...

According to Mallaby, "Within hours of the Treasury announcement Friday, economists had proposed preferable alternatives. Their core insight is that it is better to boost the banking system by increasing its capital than by reducing its loans."

Not surprisingly the root cause was assessed as the assumption among nearly everyone that houses would always go up, and thus only collateral need be examined, not ability to pay a mortgage:

Peter Fisher, former Treasury Undersecretary for Domestic Finance, has argued that over-reliance on collateral (for a mortgage, the house itself is the collateral) rather than cash flow (an assessment of the ability of the borrower to pay) lending has contributed both to lax underwriting standards (e.g. no-doc or liars loans) and lax monitoring of the enforcement of those standards.

Coats continued by saying that the only way to keep borrowers honest is through a down payment:

A critical feature of keeping borrowers honest and thus of relying on borrowers' assessments of their own ability to meet their payment obligations is to insure that they have enough of their own money at risk. Thus a reasonable down payment is critical. The traditional norm was 20% but government-sponsored FHA loans require as little at 3%. When borrowers have little or no financial stake in the loan, stricter regulation and scrutiny of their income and credit worthiness is needed.

Similarly, the only way to keep voters honest is by making everyone - even those of low income - pay some tax? Otherwise why not vote for every government tax increase? I think that part of the dismay and anger liberals felt was wondering why every single lower income voter wasn't voting for big government. They thought: "Hey, we've made it so you don't have to pay taxes, so you don't have any skin in the game. So why aren't you voting for our (free to you) programs?"

The problem, many say, is that the free market isn't applied to big corporations since they are "too big to fail". The thinking goes that if we would allow them to fail, then they would be more responsible next time. Which may be true, but what always follows any financial crisis is more socialism, not less. FDR excesses grew out of the '29 crash.

I don't know how you get back to freedom, once you've given part of it away. Because citizens run a democracy but our citizens don't ever credit a free market, or freedom in general, when things go well. But we certainly blame freedom when things go awry -- which leads to more regulation and less freedom, until the next thing goes awry, in which even more freedom is stripped.