Saturday, February 2, 2008

Hillary's Subprime Bailout; A Carter-esk Solution!

Probably one of the most ridiculous proposals by any one candidate for President is Hillary Clinton's proposed fix for the sub-prime mortgage lending crisis. She has two primary elements which she believes will "fix" the problem. The first is to suspend any foreclosures over the next 90 days. And, the second, is to freeze interest rates for "five" years.

I don't know who is advising Hillary on this one, but this is the most absurd proposal I've every heard. And, it is a play that is straight out of Jimmy Carter's dumbest plays in government history.

During Carter's absolutely failed administration, he froze oil prices in order to try to combat the oil embargo by OPEC. However, this action didn't address the primary issue of oil shortages but exacerbated it. The artificially induced low prices did not create the financial incentives that would ultimately be needed to stimulate more oil drilling and overcome the oil shortages that we were faced with. As a result, people stood in lines nearly a mile long for hours on end to get gasoline for their cars. Once the Carter Price Controls were lifted, the price doubled (another shock to the consumer). However, those higher oil prices created the incentive to explore and drill for more oil and the net result was that OPEC was forced to breakdown their embargo because they couldn't control the market any longer.

Hillary's plan is similar. By ignoring market forces and artificially freezing interest rates for mortgages for "five" years on existing loans, she will force rates on other types of loans to rise abnormally to compensate for it. Small business loans will be set at abnormally high rates and will result in a disastrously slowed economy for the lack of new businesses and jobs to meet our growing population. After all, small businesses account for the nearly 80% of the jobs in our economy. Also, these frozen interest rates will force lenders to be extremely cautious and limit their risk. New home loans (and auto loans) will be only given under the best of conditions. I would expect minimums of 20% or 25% down on a new home. Also, borrowers will have to have extremely high credit ratings; which, as a result, will mean that the housing market (except for the wealth) will just dry up. Thousands in the homebuilding industry will be out of work. Talk about making a recession worse.

Artificial controls are a horrible idea and just typical of someone who doesn't understand the first thing about business and economics. Carter may have been a great and prosperous peanut farmer but he failed miserably in the world of domestic and world economics. And, Hillary is no different!

We have to come to the realization that a lot of people received home loans that they should never have had. Trying to rescue those people is just delaying the inevitable (like the doubling of oil prices when controls were lifted). Our focus should be on those who are marginally at risk and that may need short term help for a year or two to get out of the bind they are in. Some kind of loan assistance may be in order.

Finally, we should "not" bailout those people who leveraged their existing homes in order to try and play the "boom" in the house market, thinking that they could "flip" houses for a quick profit. They took a financial risk and they should accept the consequences!

The fact is, the majority of foreclosures are already in progress; and, not reversible. The people are already out of their homes. The politicians have to move quickly, now, and not when a new President takes office next year if they are to forestall any further deterioration of the housing market. The actions by the Federal Reserve to quickly lower interest rates with help. That will keep any adjustable rate mortgages from rising any further. However, there are a lot of people in trouble because the salaries aren't increasing at the same rate as their mortgages; their taxes; their food prices; and, their energy costs.

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