Thursday, May 31, 2007

Subprime Political Proposals

Take a focused look at the functioning of any given part of the economy and the inefficiencies, bungled decision making and questionable ethics will scare any rational individual to doubt. In close up human nature is seldom artistic but in aggregate the dynamics of the market keep things in (sometimes wobbly) balance.

The Subprime Mortgage "Crisis" Will Fix Itself: Hardly a day goes by without someone's proposing how to make the bad situation in subprime mortgage lending even worse. Legislators at all levels of government are contending for ownership of the most destructive idea. Finalists in this legislative race to the bottom include punitively stiff lending standards, foreclosure holidays and taxpayer-financed bailouts. I would like to propose a far simpler, fairer and effective course of action: let free people sort it out for themselves.

A regulatory solution is a one size fits all mentality that consequently stifles the free market's innovation and creativity and in the process restricts competition by raising entry costs. Friedrich Hayek, 1974 Nobel Laureate in Economics, referred to this as the "pretense of knowledge" syndrome infecting central planners. More order and fairness comes out of the spontaneous interaction of thousands of voluntary free market transactions.

Any government actions that “eviscerate contractual agreements” weakens the principled rule of law that is the foundation of the American economy. There are times when the best approach is to let the pain play out so the mistakes are not repeated. The S&P 500 hits an all time high today which I take as evidence the portion of US housing market in trouble is only a limited aspect of the overall domestic economy, and the equity markets truly are reflecting the liquidity of the entire world. If we can keep the politicians from sobering up long enough to legislate counterproductive solutions, then life will continue on a little bit wiser.