Not So Dismal

Making Economics a Little Easier to Understand

Posts Tagged ‘Housing

Stop the Bailout Train

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In response to today’s Politico Arena question, “Does McCain’s ‘Homeowner Resurgence Plan’ announced at the debate make sense?” (Text of plan from the campaign’s website can be found here.)

The problem with the McCain campaign’s proposal is that it favors certain types of investment (namely, housing and real estate) and does so with taxpayer money. What compensation is to be given to those that own Apple or Google stock, with both companies’ market capitalization nearly sliced in half in the past year? Will there be a bailout for stock market investors that were “misled” into buying at prices that make the investment seem unpalatable today?

Government assistance in guaranteeing low interest rates is still an affront to the free market, but a more necessary and less harmful one. It is true that many homeowners were misled into accepting deceptive mortgage terms, and many families may be willing to continue to pay down the original principal of the loan if their payments at the very least do not go up from here.

Free market adjustment of mortgage values should be encouraged, too. Homeowners have every right to simply walk away from the mortgage they signed. The banks that hold these loans will often be very willing to rewrite mortgages to lower values on their own accord, rather than assume the responsibility of the property and be left with a house they may not resell for a long time.

Involving the federal government in yet another facet of a problem that, at its origin, is the result of artificially low interest rates will only serve to increase the national debt, lower the dollar’s prestige, and accelerate the rate of inflation, only further penalizing those that continue to pay their mortgages or invested in assets other than real estate.

Written by caseyayers

9 October, 2008 at 8:08 am

Wesbury on Mark-to-Market

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Brian Wesbury, chief economist for FTPortfolios, has a tendency to be about twenty miles ahead of the curve and has an enviable gift when it comes to explaining complex issues in a relatively easy to understand fashion.  When you’ve seen me refer to relaxing mark to market requirements for some of the housing securities out there, this is what I mean:

Here’s something you won’t believe: Fannie Mae and Freddie Mac have not drawn a dime from the Treasury’s $200 billion facility that was created to bail them out. It was the use of mark-to-market accounting that allowed Treasury to declare them bankrupt. On a cash flow basis, they were solvent.

Mark-to-market accounting causes so much mayhem because it forces financial firms to treat all potential losses as if they were cash losses. Even if the firm does not sell at the excessively low price, and even if the net present value of current cash flows of these assets is above the market price, the firm must run the loss through its capital account. If the loss is large enough, then the firm can find itself in violation of capital requirements. This, in turn, makes it vulnerable to closure, nationalization or forced sale.

Wesbury’s suggestion could be implemented by the Securities and Exchange Commission very quickly and would do a lot more to settle the markets than writing a check with its basis in freshly-minted debt.  Full article can be found here.

Written by caseyayers

1 October, 2008 at 1:43 pm