Not a Bailout?

I was watching CNBC over lunch and saw that Alan Greenspan has criticized the President's plan for freezing the interest rates on some adjustable rate loans.  He argued, and I agree, that it is bad to mess with contracts and markets, and bad to stand in the way of a real estate bubble that needs to correct.  He said that if the government feels sorry for certain mortgage holders, it should give them cash.

I am not too excited about giving away cash to people who made bad financing decisions, particularly since I have successfully weathered a couple of tough years in my business brought about in part by rising rates on our businesses adjustable rate loans.  However, I am very much a supporter of being as open and up-front as one can be in government taxing or spending.  For example, I prefer direct payments to farmers rather than price supports.  I prefer a carbon tax to CAFE-type mandates.  In both cases, while both alternatives probably cost the economy about the same in total, the cost-benefit tradeoff is more clear in the first alternative.  Which is why, predictably, politicians usually prefer the second alternative. 

All of this pops into my head because apparently the President's reaction was that he preferred his plan to a "bailout."  Huh?  How is his plan any more or less a bailout, except that the exact costs are more hidden and who pays the costs are more obscure.  The only real difference is that Greenspan's approach is probably less likely to set bad precedents for the future or to make mortgages more expensive for the rest of us, which the President's plan almost certainly will.

  • Bearster

    I wouldn't offer or defend any kind of looting, because it's it's better in some regard than another kind. I think the litmus test is "if it wasn't for a competiting proposal, X, would I be saying this?"

    Just say that freezing interest rates represents looting by force, and leave it at that!

  • Mesa Econoguy

    I work in the markets, and I’ve had enough of Greenspan.

    I saw the promo for the same thing on CNBC (the saying is true – picture is on, but sound is off) and thought “oh, great. Doesn’t this guy know how to shut up?”

    Freezing interest rates is primarily a price control, which will fail. It is an exogenous nonmarket force that will result in greater dislocation, not less. That’s what Greenweenie was driving at, and why Bush is getting away with not calling this dumb idea what it is – a bailout (or at least a Mulligan) for irresponsible borrowers.

    But then again, government is an expert witness in that area, is it not?

  • Jim Hart

    Greenspan is being sarcastic (imho).

    How ridiculous is it really, to suggest that the government give cash to people who make bad decisions... OH WAIT!!! That is what we do! Right, we give cash to people who can't or won't work, and punish people for working hard.

    Price controls create shortages. If they cap the interest rates, it will lead to a shortage of loan product, which will destroy the market and drive home prices down that much faster. I'm all for it.

    Perhaps Greenspan believes, as I do, that the only solution at this point is for the lights in New York City to go out, and for all of us to be in "Galt's Gulch"? Perhaps his plan has been to accelerate that exodus all along? Can you say, Francisco D'Anconia?

  • Bearster

    Greenspan took the job that John Galt refused. He's spent his whole career trying to prove the statists' thesis correct: that an expert who's smart enough actually *can* micromanage the economy. As such, he has done the exact opposite of D'Anconia or Galt.

  • Jim Hart

    I don't have insight into his motivations. I would love to hear more about it if you do. I pose the possibility that he has done a better job than I at making a difference. Certainly, he is not John Galt. But, perhaps closer to a Francisco-like Character who helps the system to move more quickly to demise.

    Bearster, I'm glad you get it. It warms my heart.

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