A Level Gaze

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Sunday, March 18, 2007
It's not quite that simple

Atrios puts forward the rudiments of his response to the mortgage crisis:
Essentially you need to make it possible for people to refinance, both by getting rid of prepayment penalties and strongly "encouraging" lenders who gave out a bunch of mortages they shouldn't have to renegotiate the terms in order to make repayment more realistic.
I know Mr. Black is an actual, like, economist, and I'm just some schmuck, but I think he's entering into some very dangerous territory with his prescriptions. We're only weeks away from this story jumping to the top of every newspaper, and politicians and rabble-rousers are going to be climbing all over one other with their "solutions" to this Grave and Serious Problem. Eschaton is very widely read (for good reason) by just about all of the lefty Establishment types. I'm worried they'll follow him up on it.

In my mind, I liken the situation to an auditorium full of people who have just discovered the exits are locked and there is a very powerful bomb in the room, which, for all the world, exactly resembles an M-80. Not a trifling problem, but a threat they think they can handle. In reality, it's going to completely blow out one of the auditorium's walls no matter what they do. If they don't do everything right, it will bring the whole building down on them.

If mortgagees are allowed to reduce their payments, a cascade of effects follows:
  • Payments to the investors who bought these loans will decrease. They will demand compensation. These costs will run to hundreds of billions of dollars, the bill ultimately falling on the U.S. taxpayer.

  • If interest rates on such a large part of the credit market are reduced to accomodate
    mortgagees, the value of the dollar will decrease. Those holding dollar-denominated assets will see their values eroded. In addition to foreign central banks and investors, pension and mutual funds will be affected.

  • If the dollar goes down, inflation and interest rates will go up. In the long term, this will be good for manufacturing and exports, but the shorter term effects will be disastrous for the economy.

  • Financial markets price things according to the future. If they get much more than a whiff of any of this going down, prices of all kinds of assets are going to be marked to their future market value, and very, very quickly. The loss of value will be staggering.

Unfortunately, much of the above is probably unavoidable at this point, and throwing money at the problem will only postpone and worsen the inevitable.

I agree that people who were given loans they had no hope of repaying should get relief, but meddling in the markets, especially at a point where conditions are so far from equilibrium, is extremely dangerous.

A better approach would be to allow those (and only those) who were given clearly unrealistic mortgages to walk away from their obligations with no or significantly reduced penalties. This would include an exception in the bankruptcy laws (which need to be completely overhauled, anyway), and a reduction or elimination of the credit score penalty. It's not as though anyone will be trying to throw money at them anytime soon, anyway.

Such an strategy would split the hurt between the banks and those who bought the mortgages, and allow former homeowners to make a clean start without the mortgage monkey on their backs.

There is no silver bullet for this monster of a credit bubble; the contraction is going to work itself through the economy one way or another. Somebody is going to wind up holding the bag, and it shouldn't be the already overextended lower and middle classes. I violently object to saving the banks' bacon with what limited money consumers have left.

There are a lot of elected Democrats who carry the water of the financial industry, and this conflicts intrinsically with the interests of the vast majority of the American people. How the members of our new congressional majority react to the credit crisis will be a crucial litmus test of their commitment to our well-being.

In fairness to Atrios, he may know in his political savant's heart of hearts that some form of stupid populist tubthumpery is going to be adopted, and he's just trying to wear a path to the least harmful of them. In my naivete, I think it is important that we push for the best solution. He could very well be right.

Saturday, March 03, 2007
Mitt is a Buffoon

Josh, what I think you mean to say is that Mitt is feckless. He is unserious, a thoroughgoing opportunist.

People will sense this.