10.01.2008 0

Still Deaf to the Sirens Song

  • On: 10/07/2008 14:34:30
  • In: Economy
  • Last month, ALG News reported to you that Minnesota Governor Tim Pawlenty, a Republican, had responded to the call for a foreclosure bailout with the fortitude of Odysseus in resisting the sirens’ song.

    This month, we are pleased to report that Governor Pawlenty is standing firm in promising to veto legislation which would postpone houses from being foreclosed upon:

    “[T]he measure in Minnesota would let homeowners delay foreclosure for one year … if they keep paying at least 65 percent of their monthly mortgage payment. The option is only for owner-occupied homes financed with subprime loans.

    “The Minnesota Senate passed the bill 34 -29 on Monday. The House is waiting for the rules committee to decide when to move a companion bill to the floor.

    “But Gov. Tim Pawlenty recently said the measure would do more harm than good.

    “‘I won’t support that,’ said Pawlenty, a Republican. ‘No other state has done that. It will impact the credit markets in Minnesota in a way that’s detrimental to the other 99 percent of Minnesotans who are not in foreclosure.’”

    Governor Pawlenty is certainly to be commended for his courage in choosing to do what is right over what is politically expedient. That is the sort of leadership the American people deserve.

    And now, joining in the Odyssean ranks is President George W. Bush, who is promising to veto the legislation moving through Congress purportedly aimed at preventing foreclosures. ALG News has previously called upon the President to veto this bill, and we are happy to report that it appears he will do just that:

    “I will veto the bill that’s moving through the House today if it makes it to my desk, and I urge members on both sides of the aisle to focus on a good piece of legislation that is being sponsored by Republican members.”

    He warned that the bill will reward speculators and lenders, both of whom took and made loans that couldn’t be paid.

    Not only that, the legislation would essentially create a new entitlement when the worst of the foreclosure crunch may not even have passed yet, despite market interventions by the Federal Reserve and other government organs. For example, this news from Florida, as reported by MSN Money, under the headline “Foreclosures Accelerating”:

    “Foreclosures numbered 1,441 in December and 7,324 for the year — about 4% of the single-family homes in Lee County. And most of those foreclosures were after August. The situation is not getting better. Hank Fishkind, an Orlando, Fla., economist, estimates that it may take four years for the housing market to recover. [emphasis added]

    “The local newspaper regularly advertises auctions of homes built to sell for $250,000. The minimum bid: $50,000. Small condos are offered with opening bids of $25,000.

    “Over lunch, another real-estate agent says those $250,000 houses are now selling for $100,000 — if they sell at all. She explains that most of the properties that are selling are ‘short’ sales, in which the debt and closing costs exceed the sale value of the house.”

    Congress and many States may believe they can “prevent” foreclosures, but in reality they will be putting hundreds of billions of dollars – which could be put to productive use elsewhere – into a ship that is sinking. And sinking fast.

    A question that must be posed to policy makers before they waste these tax dollars on “preventing” foreclosures: What if the bleeding doesn’t stop? What if it gets worse? Will Big Government be there to the rescue again? And again?

    There is also a basic question of fairness. What of all the people who were foreclosed upon before the sub-prime crisis? Why is it okay to bail the sub-primers out, but not everyone else that came before them? Heck, why doesn’t government just buy property and build homes for everyone by just channeling money directly to banks that make bad loans? Where and when does the sirens’ song end?

    The answer, of course, is because it cannot. Nor should it. The market needs to be allowed to work itself out and let homes clear at lower prices, instead of incentivizing bad behavior and prolonging the market agony. If government sent a clear message that there would be no market intervention in this area, the crisis would come to a swifter conclusion, and the recovery would begin far sooner.

    In ancient Greek literature, the only way to defeat the sirens’ was either to plug your ears, or to somehow resist their song. Legend had it that if any man resisted the song, the sirens would fall into the water to perish. Perhaps our leaders should take a page from the Greeks, and follow the leads of Governor Pawlenty and President Bush.

    ALG Perspective: Not knowing when the bleeding in the housing market will end, it would be highly dangerous for the government to set the precedent of paying off foreclosures and only adding to the unsustainable growth of Big Government. For all anyone knows, what Congress is attempting to do could be akin to attempting to fill the Grand Canyon with sugar one teaspoon at a time.

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