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  • Morning Bell: Don't Make It Worse

    Reporting on the Senate’s new housing bailout bill, the New York Times claims “Senate Republicans, in particular, had felt compelled to move housing legislation quickly after the Federal Reserve’s intervention to avert the collapse of Bear Stearns.” Apparently these Republicans are determined to prove that limited government intervention in the economy does in fact breed a more massive federal role. The Senate is set to consider a slew of new amendments to the bill that could add billions more in spending and grant federal judges new powers to unilaterally rewrite contracts. The deficit spending total for the bill is already pegged at $20 billion.

    Heritage rarely agrees with the Center for Economic and Policy Research, but Dean Baker is dead on when he told the AP: “Basically, you’re giving money to builders that overbuilt and banks that issued bad loans.” Heritage’s own David John told the Washington Post: “This is a case of Congress thinking they have to do something, rather than actually doing something that will make a difference.”

    The central economic problem the nation faces today is that markets are passing through dual asset bubbles—one in housing and a related one in financial markets—and there’s no alternative to a full correction. The root causes of these bubbles are that mortgages were underwritten for borrowers who often were not credit worthy, often on terms even credit-worthy borrowers could not afford for long, and for properties that were often overvalued. Recovering from asset bubbles is painful and rarely smooth, but there is no safe or prudent way to short-circuit the process by which assets find their new, lower and proper values based on economic fundamentals. Congressional attempts to slow or soften the process would only serve to prolong and ultimately accentuate the pain.

    Polling shows the American people do not want the federal government to bail out homeowners who bought more house than they could afford. Rep. Barney Frank (D-Mass.) has already admitted it is “irrelevant” how many people congressional action actually helps. As Sen. John Thune (R-S.D.) told Politico, all that really matters is “You always want to be able to vote for something.” Well, if members of Congress have to vote for “something,” then they should make sure it does not help the wrong people or would cause distortions in the housing market.

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    Posted in Ongoing Priorities [slideshow_deploy]

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