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.
