Wednesday, December 12, 2007

Subprime bailout

There is a lot written about Treasury Secretary's Hank Paulson's proposed "relief" package for subprime borrorers.  It can be summed up in three points:

  1. Moral Hazzard - this program rewards people who were foolish enough to make risky investments by financing for homes they cannot afford.   
  2. The role of the central banks on this matter, and for that matter, the government in general, is to provide liquidity so that an orderly liquidation of non-performing loans can be done.
  3. What's wrong with falling house prices vis-a-vis other commodities.   We cheer falling food, energy, and other consumer goods prices, but when the price of housing drops - the political class goes into full panic mode.   Housing is subject to the same laws of supply and demand.  Prices for housing must go down as well as up over the long term.