Yesterday, President Bush announced the deal his administration has attempted to broker between mortgage lenders and so-called sub-prime borrowers. I won’t attempt to hash out the details of the plan, or even expound at length on the current economic crisis that began with the housing bubble. The best thing I can do for anyone that reads this and would like more detailed information is to direct you to Calculated Risk. The authors of that blog provide excellent economic insight supported with plenty of graphs and industry experience. Check it out. It will be well worth your time.
For my part, I would like simply to speculate on the nature the present and impending government intervention in the marketplace. Given that the government was going to do something (in a situation where keeping its hands off would have been the truly best option), Bush’s recently announced plan is probably among the least bad things it could have tried. So far no laws/executive orders have been passed, and as I understand it, the plan simply amounts to general guidance for the industry seeking to keep its imminent collapse orderly. If the intervention ended here, it would be relatively harmless; however, I do not believe this will be the last attempt bailout lenders sinking in a sea of funny money.
While we can only speculate on what other sorts of foolish measures are in the pipeline (inflation anyone?), we can analyze the present proclamation as fact. As such, it seems rather pointless. Since the guidance lacks the force of law, it will not ultimately cause anyone to do something which was not in their best interest beforehand. If a lender would have profited by renegotiating the terms of the loan within contractual limits it would have done so prior to the President’s announcement; if not, it would have foreclosed, and it still will. I say that the deal’s ultimate impact will be muted, because I do believe that there may be some actors that attempt to violate the terms of the original contract perceiving legal cover in the executive branch’s recent words. Barring any further intervention, however, those actions would be deemed illegal by the courts and the market would proceed along its original course to restore the balance of supply and demand.
So the question remains, if the government’s current actions do nothing, why were they done? My guess is that they are an attempt to condition us to the reality of state interference in private transactions. I would be happy to be proven wrong on this account, and see no further meddling, but I am not optimistic. The politicians in Washington cannot leave bad enough alone and will almost always make matters worse.