Sunday, September 28, 2008

They "had nowhere to go but up"

Reuters this morning filed a report saying the lawmakers in Washington "were set to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing banks in a bid to stem a credit crisis threatening the global economy." They had worked late into the night Saturday night to arrive at a compromise on Paulson's original package, which, the article said,
would keep credit markets from grinding to a halt under the burden of bad mortgage-backed bonds created by banks at a time when it looked like home prices had nowhere to go but up.
Yes, it will look that way as long as the Fed keeps lenders awash in cheap credit.

Mises Institute's Mark Thorton explains what happened to housing in four easy steps.

2 comments:

Art said...

If I'm not mistaken, the problem today is establishing an objective value in the marketplace of the so-called "poison" paper assets. In other words, the sooner they are priced, the sooner real estate values reach a floor, and the sooner a recovery can begin.

How is this intended "rescue" or "bailout" going to enable the setting of a value on all these mortgages and derivatives that are currently sitting at financial institutions around the world?

I guess I'm asking how would the magic-thinking people in our government answer this question? Or is it they simply don't feel they have to bother, and that their role is simply to try and make everyone feel good?

Art

George said...

You're correct, Art, about the need for the market to establish a price for the bad assets. It is part of the needed price restructuring of capital markets following an inflation.

The bailout boys don't believe in any of this. They claim to believe in price stability - or at least that prices should not fall. This, of course, is an anti-free market idea because the market tends to lower prices over time.

But what they really believe in is the power of government to protect their investments. They will not accept the burden of colossal mistakes. They will not stand and watch their fortunes disappear because they assumed the Fed would always fix any threat of crisis with an injection of "liquidity."

We will get the liquidity. Their fortunes will be kept safe for awhile. But crisis is wired-in to their solution.