"Moral Hazard" bailout?
In a post on Economics Briefing quotes Mark Kiesel at Pacific Investment Management:
"This reeks of moral hazard. This is pure politics as we enter an election year, and it is not going to help the problem. It's going to prolong the bubble. A government bailout which alters contractual interest payments to bondholders will fuel moral hazard problems and raise mortgage rates for future borrowers and home buyers."
First, can I underperform this company?
Robert Wallach seems to agree and gives short-sighted reasons with poor conclusions compared to the alternatives.
Housing prices are coming down regardless of what is done, the question is how fast will they come down.
Mortgages have been granted without pricing the risk into them and now the consequences of such negligence is unfolding. A rate freeze or doing nothing will not change the fact that today the world is moving towards more responsible lending practices. Investors and bankers have seen enough disasters here to be exercising more caution and they are doing that regardless of what the fed does with respect to the existing problem. To suggest that will happen because of a rate freeze is non-sense.
This is how the world works, Sally know Bill made a ton on flipping houses and Sally decides to try it. She also knows John did it without putting money down. Sally tells Hilda, who also decides to try it. John wants a home for his family but doesn't have a down payment. He know Joe got a place a few years back and Joe is doing ok, or at least he appears to be doing ok. Eric know Paul who is making a fortune of these hedge funds. He asks Paul and gets into the action.
Today, Brenda sees that Eric lost the money he was going to retire on through somekind of mortgage lending. She was thinking about copying Eric and Paul but decides she is good where she is. Tina wants a place, but she sees that John's home is being forclosed on, and Joe's home has declined back to what he paid for it, but he is very concerned about how to pay the extra interest. Tina decides renting is better for now, she just doesn't need those kinds of problems, and so on. Scott tried to find out about those no down payment mortgages but every place he checked doesn't offer them anymore.
People are seeing people being touched by this stuff and they are responding with different behaviour regardless of what the feds do.
Housing prices inflated far beyond the rate of inflation and those involved in construction and housing related business benefited from greater financial rewards than many in other occupations. Now there is going to be a claw back in those industries. Wage increases aren't going to be able to piggyback on the asset price inflation anymore and likely there will be downward pressure on wages in that sector as so many find themselves out of work.
Reduced costs, caution from buyers, investors and bankers are all going to be here. Those that must sell will be the weaker hand and prices will decline. The demand for housing is already down. Speculation out there now is by those buying foreclosures, not those expecting to ride an equity increase.
Mass foreclosure will cause much, much fast price declines and the rate freeze will slow the foreclosure rate.
Right about now I doubt very much that investors want to have little to with all but the most credit worthy. They've figured out that other wise they can lose their capital.