Fed mortgage failure

All the Fed’s purchases and all the government’s men can’t put the residential real estate market together again With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy. Between them, the federal government and central bank can lower... [more]

All the Fed’s purchases and all the government’s men can’t put the residential real estate market together again With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy. Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use its power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit. What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.) Perhaps another solution is in order. A novel idea not yet tried would be to do what other industries do to rid themselves of unsold merchandise. They hold a sale. Let prices fall until the goods find a buyer. I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders. What’s done is done. Throwing bad money after good makes no sense. The government can’t save housing without sapping something else of needed capital. The government’s efforts are “not only ineffective but counterproductive,” Barry Ritholtz writes on his Big Picture blog. “They reward the reckless and punish the responsible, and create a moral hazard.” Worse, Ritholtz says, “they penalize middle America for the sake of giant Wall Street banks.” http://www.bloomberg.com/apps/news?pid=20601039&sid=a7Z8mzKdoEZA [less]