Another bailout Rant: Government Housing Bailout Worsened the Crisis

Here is a good exposition of the Paulson bailout package in operation, and specifically answering the question: How to address the solvency issue from the housing bubble-burst? Who will pay when people are in homes they cannot afford and mortgages are worth more than the homes? Why, the taxpayer! That's the hidden message of the exposition.

The Housing Relief bill and the other govt pressure was ALL about taking the bubble-burst burden off of homeowners and putting on mortgage holders. That of course leads to the obvious result: The value of mortgage assets falls further, as their position in terms of actually getting money back weakens. The bankruptcy 'cram-down' idea (in Dodd bailout bill) would have been the ultimate insult and the ultimate destroyer of mortgage contracts. It would make things even worse. The result is that the MBS assets are more harmful on balance sheets due to Government meddling in the housing market.

Like the Cat in the Hat, the govt cleans up one mess by creating another (bigger) one.

Had the Govt not intervened as strongly, the market forces would have more correctly "shared the load" of the malinvestment. We would not have seen as much MBS writedown and we therefore would not be staring at this bad of a credit crisis. As it is, what we have here is a grifting operation where the prey is the taxpayer described in colorful detail. The "forgotten taxpayer" is the ultimate "deepest pocket" to raid.

The end result is to weaken long-term fiscal position, make mortgages more expensive in the future, over-regulate and distort housing markets, and induce moral hazard. Maybe it is the best of a bad situation (though I doubt it), but thinking this is a good thing is appalling.