Friday, August 31, 2007

Bail Out

As much as I feel for some of the people who are facing foreclosure because they can't afford their resetting mortgages, I'm not sure a government bail out helps in the long run:

LONDON (Reuters) - World stocks surged on Friday on hopes the U.S. government and central bank will act to alleviate a crisis in subprime, or poor credit quality, U.S. mortgages and ease a global bank lending squeeze the problem has triggered.


Markets were also boosted by speculation Federal Reserve Chairman Ben Bernanke may signal a further easing of policy in a speech on "Housing and Monetary Policy" later on Friday -- markets are already betting the U.S. central bank will cut interest rates at its September 18 policy meeting.

"It's expected that Bush will say something on the lines that the government will help sub-prime mortgage owners who are in danger of losing their houses. That will be seen as positive, limiting losses in the property sector," Tobias Thygesen, senior analyst at Danske in Copenhagen.

"Markets are (also) expecting the Fed to cut by 75 basis points by the end of the year, unless Bernanke takes issue with current market pricing."

Some analysts said a coordinated approach to the mortgage hiatus from White House and Fed officials could be key.

"The market is betting on Ben Bernanke coming up with clear-cut statements that if the crisis intensifies he will reduce base rates," said Heino Ruland, a strategist with German brokerage Steubing.

"But with the Bush administration stepping in, he will be less forced to do so. If it's a combined effort, then that's a reason to be bullish."

The markets love the bail out, of course, because it means less problems for the credit market which means less problems for Wall Street.

But won't bailing out the people who bought homes they couldn't really afford and bailing out the investors who bought the mortgages of people who bought homes they couldn't really afford just send the message that risky and/or stupid behavior will be bailed out by the Fed and the government in the future if enough political pressure is ratcheted up?

I just don't see how a bail out now won't cause more stupid behavior in the future which will in turn mean more government bail outs. Not to mention that, as Herb Greenberg says, home prices are artificially inflated and need to come down to get back into a historical range. Bail outs will just prolong the real estate bubble.

Enough with the bubbles.

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