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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Tuesday, December 23, 2008

Subprime Academic Piece....

The left leaning press is trying to lay blame on the mortgage crisis on 'unscrupulous' mortgage lenders. However, these 'unscrupulous' mortgage lenders were created through and supported by government policy where increased home ownership was the desired outcome. The whole piece here.....
The question that is being asked is the correct question: how did it come about that our financial system allowed such loans to be made, condoned such loans, and even celebrated such loans? The answers that are being given are not yet the correct ones, however. The main answer that is being given, that unscrupulous lenders were taking advantage of poorly informed borrowers, does not fit the evidence nor does it dig deep enough.

The “mortgage innovations” that are largely the federal government’s responsibility are almost completely ignored. These “innovations,” heralded as such by regulators, politicians, GSEs, and academics, are the true culprits responsible for the mortgage
meltdown. Without these innovations we would not have seen prime mortgages made with zero down payments, which is what happens when individuals use a second mortgage to cover the down payment of their first. Nor would we have seen “liar loans”
where the applicant was allowed to make up an income number, unless the applicant was putting up an enormous down payment, which was the perfectly
reasonable historical usage of no-doc loans (which require minimal financial documentation).

The political housing establishment, by which I mean the federal government and all the agencies involved with regulating housing and mortgages, is proud of its mortgage innovations because they increased home ownership. The housing establishment
refuses, however, to take the blame for the flip side of its focus on increasing home ownership— first, the bubble in home prices caused by lowering underwriting standards and then the bursting of the bubble with the almost catastrophic consequences to the economy as a whole and the financial difficulties being faced by some of the very homeowners the housing establishment claims to be trying to
benefit.
Subsidies and outright changes in the laws surrounding the granting of mortgages are largely to blame for the housing bubble that is brutally affecting housing and the overall economy.

As government policy leaned towards investment by consumers in housing instead of traditional savings, there was a greater than normal investment in housing relative to what would have occurred. This is now in full reversal mode as consumers will rapidly pay down debt and increase savings. This is actually a good long-term trend. However, government tax policy that favors consumption over investment and punishes and is hostile to those that earn and save, will create further distortions that will eventually have to be worked out.

The Obamessiah's grandiose plans to stimulate the economy may be a minor short-term positive but is an intermediate and longer-term huge negative. Essentially what a large stimulus plan does is to take resources from the general economy through borrowing and diverts these resources to the government's favored products and areas. But these diverted funds will decrease the productive investment that would have normally taken place without a stimulus plan. So, unless the government spending is more productive that the alternative spending would have been, the economy will actually perform below what it would have done without any stimulus plan at all.

One day we will all wake up and see what fools we have been to have worshiped the 'golden calf' and asked this idol to be a solution to all of our problems. We will hopefully realize that this idol has been the root of the problems to begin with.

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