Two Columbia Business School Professors argue in the WSJ:
Recent news articles suggest that the Treasury Department is considering a plan to offer a 4.5% mortgage for home buyers for a period of time. Let's hope it does. It would help arrest the decline in house prices that is at the base of the ongoing financial crisis and recession.
The claim that falling house prices are the cause of the ongoing financial crisis and that part of the solution is for government to support them rather perversely, to my mind, confuses cause and effect. It is almost (although obviouly not quite) akin to arguing that the government should have given money to people to invest in Madoff, to help arrest the collapse of his NAV which has had such tragic consequences.
For a variety of reasons -- not the least of which was well intentioned government interference in markets -- over the past 20-30 years, our financial system had been increasingly underpricing the riskiness of mortgages. The more the riskiness of mortgages was underpriced, the easier it was to borrow more and so the higher home prices rose. In the end, perpetually rising home prices became, perhaps, the only basis justifying the pricing.
If not, technically a Ponzi Scheme, it resembled one in fundemental ways. The racket was sustainable so long as home prices could be continually pushed higher -- by offering ever cheaper mortgages to increasingly less qualified borrowers -- when the music stopped it collapsed under its own weight. It is not hard to find many other examples of this dynamic -- conflating phantom growth driven by unsustainably accelerating leverage (often with government encouragement) with an actual increase in value -- in what passes for our economy.
Whatever the ultimate solution to our current mess, it involves allowing/forcing markets to sort out winners and losers and to far more conservatively price risk. I find it hard to imagine that it involves government again shoveling risk into markets.
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