Thursday, February 19, 2009

Saviour Based Economics Update

clipped from hotair.com
But it is certainly debatable whether we should even be trying a savior-based plan to prevent foreclosures. Do we need Uncle Sam to  “save” homeowners who have sinned against the gods of financial prudence?

James is perhaps a little too polite in this passage, but it was savior-based thinking that got us into this mess in the first place.  Congress took a well-functioning lending market and destroyed it by insisting on forcing loans to people who were at high risk of defaulting.  When government couldn’t get enough distortion through threats of penalties, it instead starting buying paper from subprime lenders through Fannie Mae and Freddie Mac, and converted them into securities sold on Wall Street, which then infected the entire economy with bad debt.  That created unrealistic demand for dubious loans, which created a housing bubble — and its collapse has created all of the mischief we now see.