Just when you think that the bailout mania could not become any more absurd, a “conservative” mainstream economist enters the picture to up the ante of outright stupidity. Martin Feldstein of Harvard, who once served as the chairman of President Reagan’s Council of Economic Advisors, had declared he has discovered the real secret of the current economic downturn: falling home prices!
Yes, just as the advisors to Hoover and FDR claimed that the Great Depression was caused by falling commodity and labor prices, Feldstein insists that falling home prices are bringing down the entire financial system. Of course, no bad theory is complete without a harebrained scheme to accompany it, and Feldstein does not disappoint:
We need a firewall to break the downward spiral of house prices. Here’s how it might work. The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government’s cost of funds and could be as low as 2%. The loan would not be secured by the house but would be a loan with full recourse, allowing the government to take other property or income in the unlikely event that the individual does not pay. It would by law be senior to other unsecured debt and not eligible for relief in bankruptcy.
The individual could repay the loan at any time or could refinance the remaining loan on more favorable terms as long as the principal did not increase. A 30-year amortization of the government loan would make the payments low, and a life-insurance policy would protect taxpayers if the borrower dies before the loan is repaid. If the homeowner chooses to accept the loan, creditors would have to accept the 20% mortgage repayment, reducing the monthly payments of principal and interest by 20%.
One of the real problems with the economic mainstream, even with those who claim to support free markets, is that they do not understand the simple equation of cause and effect, often confusing effect with cause. It never occurs to Feldstein that a financial bubble is not a good thing, and the only way for a recovery to occur is for prices to fall back to levels that are commensurate with current economic fundamentals. There is no other way.
Otherwise, we will see one bailout scheme after another, just as Hoover and Roosevelt destroyed the economy by trying to save it.