Sunday, October 05, 2008
Well, on a positive note, at least Martin Feldstein didn't use the words "root" and "cause" right next to each other when laying this egg of an op-ed piece in yesterday's Wall Street Journal aimed at helping solve the credit crisis.
In order to make underwater homeowners less likely to walk away from their properties, reduce their outstanding mortgage balance by 20 percent, and give them a government loan for that amount in its place.
This thinking is apparently based on the assumption that your typical American homeowner can't do simple addition.
The Problem Is Still Falling House PricesThis has got to be the stupidest idea I've ever heard.
The bailout bill doesn't get at the root of the credit crunch.
By MARTIN FELDSTEIN
A successful plan to stabilize the U.S. economy and prevent a deep global recession must do more than buy back impaired debt from financial institutions. It must address the fundamental cause of the crisis: the downward spiral of house prices that devastates household wealth and destroys the capital of financial institutions that hold mortgages and mortgage-backed securities.
We need a firewall to break the downward spiral of house prices. Here's how it might work. The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government's cost of funds and could be as low as 2%.
Consider a homeowner who has a mortgage equal to 90% of the value of his home. The 15% decline in the value of his house that may be needed to bring it back to its prebubble level would shift that homeowner into negative equity. Further price declines would make default attractive. But the 20% mortgage replacement loan would take the loan-to-value ratio to 72% from 90%, making it unlikely that prices would fall far enough to push him into negative equity. An interest saving that could be as large as $3,000 a year would provide a strong incentive to accept the mortgage-replacement loan, even if the individual thinks that he might temporarily have a moderate level of negative equity.
The argument about a low-cost loan cutting back on monthly payments has a tiny degree of merit, but the idea that the homeowner is going to think about his mortgage obligation differently because it is split into two pieces is just plain dumb - especially if the new loan is full recourse and from the U.S. government!
The whole idea of somehow propping up home prices is just sickening and the notion that renowned economists still think the root cause of the current problem is falling home prices rather than the policies that allowed home prices to rise to their previous bubble heights - well, that's even more sickening.
(Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors)
This week's cartoon from The Economist: