Half-Baked Mortgage Bailout Backed by Treasury Secretary

MSN and The Economist point out the deep flaws of the bail-out fund backed by Treasury Secretary Henry Paulson that would try to artificially prop up the value of mortgage-backed securities. The fear motivating the bail-out fund is that if the banks and investment firms unload their mortgage-backed securities during the mortgage meltdown, the low prices they’ll get will reveal just how worthless many of the securities they hold are, and result in their net worth being revealed as much less than they publicly claim. It brings back memories of Enron. Bill Fleckenstein of MSN calls it a “super-duper bad-loan bailout scam.”

If the Treasury Department hoped its meddling would reassure the markets, it failed. As the Economist notes, “stockmarkets fell on the day of the announcement. To some, the Treasury’s participating signalled that things were worse than feared.” It was the same kind of clumsy attempt to manipulate the markets that occurred during the Hoover Administration and the first couple years of the Roosevelt Administration, which exacerbated and lengthened the Great Depression.

We’re not in for a repeat of the Great Depression — especially since many of our trading partners are doing quite well — but a recession is possible, and government meddling that vainly seeks to prevent a market correction will only make it worse.

CEI’s John Berlau wrote in the Wall Street Journal about how federal agencies contributed to the mortgage bubble and the proliferation of fraudulent mortgages. I have previously written about the mortgage meltdown, and how the very lenders that today are faulted by government officials for overlending and “predatory lending” to people of modest means were earlier faulted by government officials for not making enough loans and for supposedly not giving enough mortgages to members of certain groups (“redlining”).