Tuesday, May 06, 2008

But Bernanke, That's a Contract You're Trying to Destroy

I don't understand where Bernanke is coming from these days. Now he's pushing government intervention into the mortgage market, advising lenders to write off the value of mortgage collateral to "save" those homeowners who are in a credit squeeze.

I like the way Peter Viles analyzes the situation in his real estate blog at the LA Times.

What Professor Bernanke seems to be ignoring is the fact that these mortgages are contracts; and the contract is a vital element of our way of life.

An illustration:

The subway schedule.

[Thanks to Blog.valuewiki.com for the photo.]

A large city's subway system publishes a schedule so that commuters can make it to work every day at the same time, no matter what the volume of riders.

This schedule is a contract between the subway company and their customers, and it is immutable except in rare cases of danger to the public. It never changes, not even when 10,000 commuters' alarm clocks don't ring.

Can you imagine if the city decided to heed all the hate thoughts coming their way and delayed the 7:30 a.m. train, because a few thousand--or even a million--commuters didn't like to get up in the morning?

If they started to do that, commuters would start researching alternative means of transport, just in case. What a waste. It would result in the diversion of millions of dollars of consumer spending towards bicycles, running shoes, and second cars, and a wave of real estate conversion to accommodate the new parking needs.

This is only a light-hearted example. But imagine what would happen if the government started to bail out former renters who have bought homes that are too expensive for their means. It would mean that lenders would begin to raise prices to cover the risk of future government intervention into the contracts they will sign with tomorrow's borrowers.

Or what if the Federal Reserve were to start bailing out big finance houses......

AAACK! Good grief. I forgot; they have already done that.

Oops. I wonder what contracts will be next. Student loans? Credit cards? Municipal bonds? Pension funds?

Nah, they can't be that stupid..... can they?


Anonymous Anonymous said...

just now (may7) the Potus just authorized legislation so the federal dept of education can buy federally guaranteed student loans that lenders haven't been able to sell to investors

so ur prescient i guess

8:25 AM  

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