Sunday, December 09, 2007

Govt. Solution: Pressure to Renege on Contracts

The government sure has a funny prescription for restoring confidence in America's credit markets. It purports to solve the nation's credit crunch — a slowdown stemming from investors' loss of trust in instruments such as mortgage-backed securities — by pressuring millions of borrowers and lenders to renege on their contracts and bilk mortgage investors.

Unless there was fraud, both borrowers and lenders should be expected to live up to the terms of their contract, unless they mutually agree to changes. Innovations such as ARMs enabled many smart borrowers to improve their prospects by using the extra cash flow for purposes such as starting a business or getting a new degree. These responsible borrowers and their lenders should not be punished for the imprudence of others.

John Berlau of the Competitive Enterprise Institute, writing in USAToday


At 12/10/2007 4:43 PM, Blogger capitalgain said...

If you renege on contracts today, then you can expect tomorrow's cost of entry (into housing markets) to increase substantially (for those marginal buyers that the subprime loans intended to "assist") in order to compensate the lenders and the buyers of the damaged paper for taking on increased risk. And this problem will take years to get resolved.

That's how the law of unintended consequences always works. What didn't work is now and forever totally broken.


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