Wednesday, December 12, 2007

The Mortgage Fix

Llewellyn Rockwell has an article about the mortgage bailout at Mises. Rockwell is an inflexible libertarian, but he knows his economics:

Joy, joy, the Fed has cut rates again. Picture the Joker from the movie Batman throwing money from his float on the parade and you can see where this is going. Or imagine the alchemist of medieval lore, attempting to conjure up wealth from chemical mixtures.

The sea of inflationary credit is the core problem behind the falling dollar, the subprime crisis, the housing meltdown, not to mention the rise in the national debt and a thousand other problems.

And how do they deal with it? More credit and more calls for controls. No one in Washington seems to understand the reason for the crisis, much less how to fix it. The markets go for this stuff for a while until it looks like Washington is in panic mode. Even Wall Street is starting to sense that something is very wrong.

A good indication is President Bush's freeze on subprime mortgage rates. It is a classic case that provides serious lessons for all of us. It shows the political penchant for intervening in the market, the market response, and the further interventions that are called forth when the first round doesn't bring the utopia they imagine.

Rockwell covers the source of the sub prime market. As usual it has government intervention written all over it:

The incredible fact is that these loans are an expected result of 15 years of government propaganda about mortgage loan "discrimination." Some genius noticed that the loan markets tend to favor people with good credit histories and some savings built up over time. And then some other genius noticed the demographic fact that these credit histories, in general, parallel racial demographics. Hot button! And so the pressure was on to lend as if the prospect for repayment didn't matter.

The portfolio of loans in this category were only viable if we presumed that housing equity would rise forever. Then it works like magic. It's like an economic perpetual-motion machine. You borrow and borrow and the loan pays itself off. Crazy? Yes, it is, but such is the craziness of any inflationary environment. It leads people who should know better to believe that the impossible is happening.

Rockwell, like every good Austrian economist, sees the Federal Reserve and other government intervention in the market as the source of most, if not all, evil in the world. I wouldn't go that far, but in this case, I think I have to agree.

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