First Thoughts on the Obama Housing Plan

Although I have yet to read the specifics regarding Obama's new mortgage bailout, I do want to comment on such governmental actions on a more fundamental level. Traditionally, progressive politicians have attempted to redistribute wealth in America to create a more equitable allocation of capital. In other words, they would tax wealthier individuals at higher marginal and average rates than the poorest people. These higher taxes would then be used to pay for programs that helps the poorest Americans. Regardless of how you feel about these policies, at least the Democrats were honest and straightforward, stating that this was their ultimate goal. This mortgage bailout plan is not a redistribution of wealth in the traditional sense though. Instead it is a redistribution of debt, where fiscally sound Americans who did not take on bad debt are forced to pay for unresponsible Americans who took out mortgages that they could not afford.

No doubt that the banks and financial institutions who approved these suspect mortgages, such as sub-prime and option ARM mortgages, are also to blame. However, what did the Bush administration and now the Obama administration do to hold these lenders accountable? Nothing but give them billions in bailout money. Of course at this point it would be extremely difficult for let these huge financial institutions fail, especially after companies like Fannie May and Freddie Mac have received implicit guarantees from the federal government for years, taking risk out of the financial system. But regardless of how this crisis started, we now must decide how to fix it. My question to you is if we aren't sure how the housing crisis began, how do we expect to fix it on a fundamental level so that it won't happen again?

The answer is no one really knows how to fix it at this point. Over the past year, it has been shown that our current system of assessing risk through institutional credit ratings is flawed, and it is extremely hard to assess the value of mortgage backed securities for a large number of reasons. It is hard to tell how many foreclosures there will be, what if any aid will come from the government, and the securities have been partitioned/repackaged/resold so many times it is hard to tell who owns what. However, it is fundamentally unfair in my opinion to make fiscally responsible americans to pay for the excesses of those who didn't wait to put a full down payment on their homes, and were then forced to accept more unfavorable loan rates.

Over the twentieth century, economists worldwide have rejected central planning of economic forces as the most efficient way to run an economy in favor of the price mechanisms of capitalism. Regardless of how intelligent you think Obama is, even he doesn't know how to distribute this debt in an efficient and fair way. The way to rid our economy of this bad debt fastest, and in a way that is most fair to the large majority of the public, is to let bad contacts default, and force the debt on those who took the risk: the lenders and borrowers of the bad loans. Let our free market system work. The bankruptcy system is the U.S. is designed to protect people in these situations and will quickly and efficiently remove the bad debt from the system. Obviously this is a difficult option. The markets will fall, people will lose their homes, and financial institutions may be bankrupt. In the long run, however, this will be a much cheaper solution for a majority of americans, who would be forced to pay higher taxes and an inflated rate for goods and services if we finance a bailout using borrowed money.

Everyone likes capitalism during economic booms, as it effectively distributes income in a fair way. However, now that we are in an economic downturn, people are scared to let bad debts be payed by the people who created them. Until we hold the bad debts accountable, risk will still be absent from our financial system, leading us to repeat this same mistake once again farther down the road. And perhaps at that time we won't be able to borrow our way out of it.