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OpenMarket: September 2008

  • Let's Eliminate PMI-As-We-Know-It

    September 30, 2008
    Borrowers who put less than 20 percent of a home's value down for a mortgage almost always have to secure “private mortgage insurance” (PMI) to protect their lender if they default. In 2007, PMI became became tax deductible for borrowers, thus further lowering the cost of homeownership and encouraging more people with small down payments to begin buying homes. As it stands, the PMI creates enormous perverse incentives: it encourages lenders to lend to people who put down as little as 3 percent of the value of the home. Since it is a rare product that brings no benefit to the "consumers" who buy it (it protects only lenders), PMI encourages borrowers to do anything they can to avoid having mortgage insurance and, understandably, shop on price alone. The system set many people up for a fall by encouraging lenders to take risks with borrowers who look very bad on paper. It was also...
  • SEC Loosens Rigid Accounting Rules

    September 30, 2008
    Rigid mark-to-market accounting rules may have triggered the current financial crisis by artificially undervaluing mortgages and securities (making financial institutions appear insolvent).   Even the very government officials who have advocated those rules now hint that they will disregard them in valuing the government's own mortgages, in administering any bailout!  (This inconsistency undermines arguments for the bailout). The SEC today made federal...
  • The Market's Winners and Losers

    September 30, 2008
    The People have spoken. They have picked the Market over the Government to be the chooser of winners and losers. Here are the Market's choices for winners: 1. Those that live in their homes, versus those that purchased houses to be flipped (third letter). 2. Homeowners that purchased a house that they could afford with a 30-year fixed, versus the over-extended with an adjustable rate. 3. Small local banks that didn't make ARM loans with no money down, versus big ones with mortgage-backed securities. 4. Those that saved their money, versus those betting on the stock market. 5. Those who pay for their cars with cash, versus those who finance them. 6. Those who pay for their expenses with cash, versus those who run up credit card debt. 7. Those who save money for their kids' college funds, versus those who rely on loans. 8....
  • What Are Markets For?

    September 29, 2008
    There are all sorts of people today who normally talk about free markets but who have got themselves into a tizzy over the failed bailout. We need to get one thing straight - the bailout was the wrong answer to the wrong question. To begin with, the plan was merely postponing the inevitable, as a letter in the Wall Street Journal pointed out this morning:
    The lesson of past financial inflection points is that we must let the markets reallocate capital from less efficient to more efficient uses. The sad fact is that we need to go through a brutal process of resizing down our financial and real-estate industries. Actions to try to recapitalize doomed financial companies only postpone the day of reckoning, which will make matters worse as the Japanese learned in the 1990s.
    Secondly, we...
  • Republican Study Commitee plan now best viable alternative

    September 29, 2008
    The stunning defeat of the Hank Paulson's socialism-for-Wall Street bailout on Monday has just made planks of a pro-free market alternative much more viable. As Open Market has noted before, The Republican Study Comittee, a caucus of pro-market members of the GOP Congress, has presented such a plan that would be much more effective at stopping the contagion than the Paulson bailout, and many of its provisions would not cost taxpayers a dime. The RSC plan is chock-full of measures to remove barriers to economic growth and market-distorting subsidies. It would suspend capital gains taxes to put trillions of dollars of capital in the economy, and set Fannie Mae and Freddie Mac, which as CEI has documented were at the...
  • Bailout fails -- Move on to Mark-to-Market Reform

    September 29, 2008
    Oh, Happy Day! And it certainly is for all those who value freedom, responsibility and the true free market in which individuals are free to profit from their risks on the condition that they don't stick the rest of us with their losses. It's not hyperbole to say the Republican and Democratic backbenchers who defied both parties' leadership to defeat this $700 billion package of Wall Street socialism literally saved America. Whatever their reasons, this defeat (or rather victory for freedom), means that...
  • Investing in Communal Failure: The Current Economic Crisis as a Result of Regulation

    September 29, 2008

    Unfettered greed is the suspect many point at to explain the current economic crisis. To some extent, they are right, but it isn't irrational greed on the part of bank managers or fat cat CEOs. It is the unwieldy bank regulations that forced the entire industry to walk the proverbial plank and then blame it for drowning.

    Critics have alternately claimed that over-regulation and under-regulation are the causes for the current crisis. I believe one specific regulation, the Community Reinvestment Act (CRA), should shoulder a lot of the blame for creating an environment where a lending institution's short-term survival hinged on it making the decisions that in the long-term would likely cause its demise.

    As I noted in my paper ...

  • Stocks Climb as House Rejects Bailout

    September 29, 2008
    Though the bill may have been defeated for the wrong reasons—like the lack of freebies, giveaways, and handouts that many on the left had hoped for—the defeat of the bailout bill in the House has brought stocks out of their decent. The Dow Jones is now climbing. But how can this be? How could a bill that was designed to save our economy, our country, and the world be the cause of the Dow's drop today? Easy, the bill was introducing such incredible uncertainty into the market that investors were panicking. It could also be that Wall Street—despite the recent bank closings—is still smarter than Washington. The reactions of investors suggests they realize the bill may have done more harm than good. For more on why a defeated bailout bill is a very good thing and why the world doesn't need saving, read...
  • BREAKING NEWS: Bailout Vote Fails in House

    September 29, 2008
    The House of Representatives just voted down the $700 billion corporate finance bailout, despite earlier urging from President Bush to push the measure through. Look for in depth analysis from our very own John Berlau and the rest of the policy team as the day progresses. Read CEI's roundup of the continuing finance crisis (and sign up for email updates) here. NEW: John Berlau responds (and speaks!) in reaction to today's vote. Updated post and audio clip...
  • LibertyWeek 9: Ballparks & Bailouts

    September 29, 2008
    LibertyWeek, CEI's weekly podcast, covered the bailout and the financial meltdown on Wall Street in its last episode.  "Bailouts & Ballparks" features an interview with John Berlau, Director of the Center for Entrepreneurship at the Competitive Enterprise Institute.

    My guest co-host William Yeatman and I discuss with John how excess regulation, the Federal Reserve, failed housing programs, government sponsored enterprises, and corruption brought Wall Street to its knees.  The three of us come away from the interview with a different conclusion than the mainstream media.  Rather than labeling...


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