This weekend the Bush administration proposed a 700 billion dollar bailout of bad mortgage debt to unfreeze the credit markets in the United States. Some members of Congress even argue that this bailout is not big enough. Through all of the arguing between how big or small the bailout should be the talk has been minimal in asking whether this bailout is necessary. Just because everyone is saying it is necessary doesn’t necessarily mean it’s true.
The fact of the matter is that the federal government does not have the money to buy up this debt. Instead, the government will take on debt to buy faulty mortgage debt. This bailout policy is putting more people on the line, not less as a bailout may imply. To understand the bailout one needs to look at the nuts and bolts of what goes on behind the scenes to make this plan go into effect.
Being the United States is running up huge deficits and is heavy in debt we don’t have hard cash to bailout faulty mortgage debt. In order to initiate the bailout, we will have to print money to bail out the firms. The printing of more money leads to an increase in the money supply is the same thing as printing credit and money out of thin air. Too much credit in the system without the proportional increase in real wealth was the cause of the problem in the first place and now we are trying to solve it by creating more credit and more money out of thin air. The answer to inflation is not more inflation.
There are many ways to solve our current economic problems. We need to balance our budget by simply living below our means, return to a sound monetary policy of low inflation and low borrowing rates, and lowering taxes. This would make housing more affordable for more people and increase our standard of living. We would have temporary economic pain of a year or two but the alternative of this bailout is we could have economic pain for the next ten to thirty years depending on how many band-aids they put on the system. These economic band-aids are propping up prices, which only prolong the pain.
Eric,
As Congress meets to discuss how to squander $700 Billion of the nation’s money in a large government bailout, may I suggest a much less costly free market approach? If I look at my own finances, I have a mortgage on my home. I also have a 401K balance and an IRA balance that both exceed my mortgage balance. The only reason I have a mortgage is that there is a high cost penalty to move money from one place to the other (marginal tax rate plus 10% penalty). The government has “encouraged” me to take on debt.
I’m willing to make a deal with the federal government. If the government is willing to accept a 20% tax rate on a 401K or IRA withdrawal to pay off a mortgage, I’ll help provide liquidity to the mortgage industry. I’m willing to withdraw enough money to pay off my mortgage AND pay the government a 20% tax. I think this helps me, the federal government, and the banking industry. For a typical $100,000 mortgage, the banks would get $100,000 and the government would get $25,000.
I’m sure I’m not the only one willing to make this deal. Currently there is about $6 trillion in 401K and IRA assets. If 20% of these assets are used to pay off mortgages, the mortgage industry gets a quick $960 billion in liquidity and the Federal government gets $240 billion. Rather than exploding the deficit, we would reduce it.
Are there any free market Congressmen and Senators willing to allow free markets to work?