So we seem to have settled on a Fannie bailout. Yuck.
While I don’t see any alternative to a government rescue, I’m deeply disturbed by the bailout of the large mortgage agencies. By providing an emergency line of credit, American taxpayers are subsidizing the risk-taking that went on as more and more people bought more and more homes.
But easy credit and rising home prices didn’t turn out to be an unmitigated good thing. When an average income can’t afford to buy the average home the only way to keep prices rising is to get “creative” with the financing. And that meant loaning money to people who couldn’t afford it.
Now the chickens have come home to roost and the government’s stepping in. What’s the right interest rate for a mortgage? Ask your legislator. In a market economy, people with competing interests settle mutually agreeable prices. When risks are socialized, the government sets the prices. If rates are set too low, the Feds will be saddled with a lot of below-market debt.
After 70 years of price-setting nonsense the planned economies of Europe collapsed under their own weight. Let’s hope that it doesn’t take a similar failure in mortgage finance to cure us of the same error.
Douglas R. Tengdin, CFA
Chief Investment Officer
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