Sub Prime Freeze Helps Whom?

We should be clear about one thing, the proposed rescue plan for struggling ARM homeowners, is primarily directed at slowing down the collapse of beleaguered financial institutions. The inputs for the plan were heavily influenced by those institutions most impacted. The veneer of beneficent social policy suggesting that these homeowners would be significantly helped does not appear to be supported by the evidence. An article in the Financial Times[1] cites a Barclays analysis that only 12%, or 240,000 homeowners would be helped by this freeze. It is patently obvious that this proposal amounts to nothing more than an additional attempt to bailout institutions whose imprudent actions lead to this set of circumstances.

Aside from the theoretical issues such as violation of contract law, establishing a precedent for the institutionalization of moral hazard (the Governmental Put, if you will), and State sanctioned erosion in the one primary concept serving as the foundation of the US, and consequently the global financial system, trust and faith in established US property rights, there is the question of equitable treatment of economic players. If we consider the context for the current economic calamity, it arose through the generation of incredibly huge profits for the players in these schemes. What appears to be being proposed is that, under the guise of the threat of global economic collapse, the policy response should be to reduce the consequences of the imprudent actions of the players who have benefited so handsomely. To make the pill easier to swallow, the sugar coating is spun to be the benefit to the “homeowners”.

As I’ve alluded to before, in other blog contributions, it is dubious as to whether “homeowner” is an appropriate term when little or no equity exists. Moreover, even if we granted the dubious theoretical justifications for the implementation of such a plan, the operational practicality of implementation is unlikely to be accomplished in a timely and cost effective manner.

It is interesting to note that in the last few days, eminent analysts, economists, and commentators, whom I’ve regularly viewed as having sober, well-reasoned opinions, even if I did not agree with all of them, appear to be becoming infected with a contagion of panic. Paul Krugman’s opinion piece uses words like “spooky”, in Robert Shiller’s Bloomberg interview several days ago I felt I heard an undertone of panic, and in Nouriel Roubini’s blog he appears to be appealing to ad hominem type support for his arguments by such statements as

“Thus only folks who are so blinded by their free markets fundamentalism and opposition to any government intervention in market failures would be so obfuscated by their ideological blinders that they would realize that this plan –however modest and partially faulty and incomplete – implies a better market-oriented resolution and much lower losses to private investors than a disorderly and “mission impossible” case-by-case workout of millions of actual or threatened mortgage defaults.”

This, in itself, is a good indication of how serious this issue is.

Ryan Darwish
Author of The Emperor’s Clothes: A Mosaic Look at the Megatrends Affecting Your Financial and Investment Decisions
[1] Financial Times, Bush Faces Subprime Loan Freeze Opposition, December 7, 2007.