For Once, Government Got it About Right

By George Lightbourn

Late last week Hank Paulson, the Treasury Secretary finally pulled the trigger on the Bush Administration’s response to the sub-prime mortgage meltdown.  Financial and political analysts are still sorting through Paulson’s plan.

So what did they do and why did they do it?  What they did was convince the mortgage industry to freeze the mortgage of just over a million people at the low come-on rates.  Other troubled mortgage holders will be counseled about refinancing.  These people will breathe a huge sigh of relief.

As to why the government took action, well the answer is a bit more obtuse.  Who were they bailing out?  In this case they didn’t take action to bail out homeowners who were about to lose their houses.  They also didn’t do it to bail out the mortgage loan industry (it would be too dignified to refer to them as bankers).  And they also didn’t do it to save the speculators who invested in the sub-prime market looking to make some easy money.

No, the Treasury Department took action to spare the innocent bystanders who were about to feel the pain of a slowdown in both the housing and the credit markets.  Most of the U.S. economy had nothing to do with the sub-prime housing market.  We scoffed when we heard of the ridiculously easy money that was available for prospective home buyers.  Things just didn’t add up.  It seemed to us that millions of Americans were moving into houses they simply could not afford.

Yet the whole country was about to feel the sting of an economic slowdown caused by tightening credit and a housing slowdown related to the glut of housing stock on the market.

It shouldn’t have been much a surprise that the housing market hit the skids.  For too long a steady stream of Americans with minimum financial acuity were tangoing with that part of the mortgage industry that possesses more greed than judgment.  To almost no one's surprise, when the teaser rates were reset, thousands of new homeowners couldn’t make the payments.  Both the not-so-smart buyers and the greedy lenders were about to get the inevitable comeuppance they deserved.

Only there were too many defaults looming for the overall economy to look the other way.  The problem was just too big.  So their problem was about to become a problem for all of us.

That’s when Secretary Paulson stepped in.  And to the surprise of those of us who have watched the Bush Administration push the federal budget into the stratosphere, the solution did not involve a mountain of federal spending.  In fact, the bailout has no taxpayer money greasing the rails.

Of course there are those who protest that the plan doesn’t go far enough.  The plan just isn’t fair is the refrain heard from the left.  Well that’s right.  The plan is not fair.  Fairness was not the goal of Paulson’s plan.  His goal was to minimize the collateral damage of the sub-prime mortgage meltdown. 

So those mortgage holders who couldn’t keep up with their pre-reset mortgage payments get no relief.  They will probably lose their homes.  Similarly, those who can afford the higher monthly payments after their mortgages are reset get no relief.  They simply have to live with the deal they agreed to.  Only the rather narrow slice of the sub-prime mortgage holders who have been keeping current on their payments, but probably cannot continue to do so after reset, will see relief from Paulson’s plan.