Thursday, April 1, 2010

Another mortgage bailout

The Administration's announcement of a new plan to bailout mortgagees' whose properties are underwater does little to add jobs to the economy. Instead, the plan will prolong the already anaemic recovery by keeping the market from discovering real prices.

Anticipating the government's actions, banks are now less likely to conduct short sales, rewrite mortgage terms, and rebase the value of their asset portfolios. This will result in lower lending, inflated interest rates, and less capital accumulation overall.  Business investment in future capacity and R&D will trend lower, delaying increases in productivity. 

The Administration's dismissal of economic reality is not surprising.  This announcement coming on the heels of the healthcare vote (which guarantees a thumping for incumbents in November) is an attempt to sway public opinion of the governing party. For the people, the price is too high.

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