True North

I returned from Las Vegas to find our blogeague Pat Shortridge’s brilliant piece on the Left’s disastrous prescriptions for the housing/lending crisis.  As you will see, Pat finds an unlikely source of wisdom wisdom on the topic.

To paraphrase Sam Malone from Cheers, it’s a sad day when the Minneapolis Star Tribune is the voice of reason. This editorial, however, shows more clear thinking about the mortgage and housing issue than has been demonstrated by many liberal politicians.

Clearly the bursting - or slow leaking - of the housing bubble has caused serious problems, for home owners, for borrowers, and for lenders. It has caused pain for individuals as well as for the economy as a whole. The complexity and magnitude of the problem (we are, after all, talking about significant price drops in most Americans primary asset) makes legislative remedies more likely to do harm than good.

Two remedies being discussed could do particular harm, making the pain longer, more severe, and more widespread. Should politicians pass either a foreclosure moratorium or rewrite bankruptcy laws to allow judges to arbitrarily rewrite mortgage terms, the consequences are likely to be devastating.

Why are these seemingly compassionate ideas so sinister? Because they bring into play the likelihood of economic contraction, just as the Smoot-Hawley tariff and higher taxes caused the economy to contract and turned the ‘29 Stock Market crash into the Great Depression.  To get our economy back on track, we need liquid credit markets, fiscal policy that encourages growth, and sound money from the Fed.  A mixture of high taxes, tight credit, and inflation is a toxic brew I hoped never to experience, but which I fear looms on the horizon if politicians don’t begin to think more clearly about these complex issues.

If companies can’t enforce contracts by foreclosing, and judges can rewrite mortgage terms, credit, even for worthy borrowers, is going to dry up. Financial institutions will not keep lending if they are going to face significant losses with little recourse when doing so. If mortgages essentially become one-way street arrangements with all of the downside assumed by the lender, with no fixed, clearly understood obligations by the borrower, lending will evaporate.

Access to credit is, for the vast majority of borrowers who continue to meet their obligations, an essential component of our American Dream, whether we’re buying a home, starting a business, or financing a college education. We must not allow politicians to make a difficult situation infinitely worse. For one of the few times in my life I would tell you, pick up the Star Tribune and bask in their wisdom.

Cross-posted and comments welcome at TVM.