Bernanke amplifies the damage of the mortgage "crisis"

Topics: Housing
09 Jul 2008

From: Ervan Darnell

> Ben Bernanke said the Fed will issue a series of new lending rules
> next week. They are designed to restrict risky, non-traditional
> mortgages and high-cost loans for people with weak credit.
> The central bank might also extend its emergency loan program for
> large investment firms into next year. [1] [ And start regulating
> investment firms. ]
This is the sort of Fed chairman we get from Bush? Bring back
Greenspan. I'm already scared what we'll get from Obama, though Wilson
may still be the worst President we ever had (he created the Fed). Both
of Bernanke's ideas are bad. The second one is more of the same: use
inflation as a hidden tax to bail out reckless speculation while
creating a moral hazard. I guess I understand the political calculus of
accepting long-term pain to help the short term before the election, but
how pathetic that's what we are reduced to.

The first is more subtle, a curious example of how laws meant to help
the poor hurt them. I think of Hazlett's example of rent control for
the poor: landlords and builders started catering to the rich since they
couldn't make a profit on low-income housing. Thus, the poor had less
housing and the rich got a price break as production shifted to their
end of the market. Bernanke seems willing to make the same mistake.
ARMs have let a lot of people buy houses who couldn't otherwise afford
them, they have also let people make money by speculating on the housing
market in a big way. Yes, I think that sort of speculation is
imprudent, but I'm poor and I have several friends who have made
themselves rich doing so. The new rules says that poor people are not
allowed to gain from appreciation in the housing market the same way
that middle income and up are, they are not allowed to bet on their own
future income increases, nor are they allowed to buy short term housing
(the most obvious value of an ARM is to use the fixed rate period for
the expected period of living in a home, but have a backup plan). This
is all in the name of helping them.

Yes, a lot of people got hurt by loans that they didn't think through
the risk consequences of. But, a lot of people benefited too. The
Fed's logic is that poor people shouldn't even have a choice.


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