President Obama has pledged $75 billion to save 9 million homeowners from eviction.Â Wow, who knew he was worth that much?
Of course, it’s not his money.Â It will most likely consist of Federal Reserve Notes recently printed (or digitally created) by the Counterfeiter-in-Chief.Â And the money isn’t going to homeowners.Â It is going to be used to prop up banks, as well as support Fannie Mae and Freddie Mac (um, wasn’t it mortgage securitization by those GSEs that got us here in the first place?Â Oh well, details, details.)Â Even more disturbing is legislation in Congress that would allow bankruptcy judges to modify mortgage contracts.Â Nothing will undermine the mortgage industry more than destroying the sanctity of private contracts.Â Who is going to enter into a contract if they know that the government can alter the terms at its discretion?
So what would happen if the government allowed the market to cleanse itself of the mal-investment in the housing market; if the Obama adminstration did nothing.Â Such a course of action would actually benefit homeowners with mortgages they can’t afford.Â Of course, the big banks would suffer and that is exactly why the federal government will continue intervening in the market.
Homeowners can always walk away from their mortgages.Â So, ultimately, it is the banks’ assets that we are talking about here.Â For that reason, if they have no other choice, banks will work with borrowers to try to keep them at least paying something.Â All the money that the government has showered on the banking industry has had the opposite effect.Â The banks are shoring up their balance sheets and writing down their bad loans instead of trying to salvage their assets, i.e., instead of renegotiating their outstanding loans.
If some banks fail, they would be forced to liquidate their assets, including their home loans.Â Whoever bought these loans would receive a bargain basement price and one that more accurately reflected market conditions.Â Thus, their profit margains would be lower than the original lenders and they could pass those on to borrowers.Â In addition, just like the original lenders, the new lenders would be much more interested in receiving some revenue than none, or, at least, none until the house could be resold.
Keep in mind that the overall price level of housing would drop if the government did not prop up the market.Â The result would be that troubled borrowers would be in a much stronger negotiating position.Â The lenders would be in the unenviable postion of renegotiating with the current borrowers at a lower price or with new borrowers at a much lower price.
Eventually the market will win.Â Obama’s plan will not help homeowners, even those who own their homes outright.Â Even if the government is able to prop up housing prices in nominal terms, the massive amount of money printing required will cause price inflation in every other sector as well.Â Hence, nothing is gained, but the value of the dollar is destroyed.Â Inflation hurts everyone, except those who receive the new money first.Â Guess who that is?Â Yep, the banking system.
Win, win for the banks.Â Lose, lose for the rest of us.