Every time the news reports some new Fed or Treasury scheme to “fix” the economy I cringe. The economy is the sum total of billions of people’s day to day decisions. These decisions are made based on the information each person has about various incentives and disincentives. It is unlikely that anyone at the Fed or the Treasury could ever decide which incentives or disincentives can”stimulate” the economy.
At this point, a recession is inevitable. It is the consequence of The Federal Reserve’s inflation and the malinvestment that followed. The best thing the government could do is get out of the way and let the market work its magic.
In a previous post I suggested that mortgage companies were not restructuring mortgages that needed restructuring because of the moral hazard create by the government’s interventions, both past and present. It looks like I might have been on to something. Now that Paulson has said he will not buy up mortgage-backed securities, some investors are seeing it as a opportunity to buy them up at rock-bottom prices. This most likely would have happened earlier if the holders of those securities were not sitting around waiting to see what the Treasury was going to do. Why sell your securities for pennies on the dollar if the government may come to the rescue with other peoples money?
The new investors will be highly motivated to restructure the bad mortgages. If they buy the securities cheap they have a lot of wiggle room and can still make a profit.
I have little hope that this bailout madness will come to an end anytime soon. Washington is more shortsighted than a 2 year-old. They want the instant gratification of telling their constituents that they are doing everything they can to “fix” the “broken” economy. They can’t understand that the economy is not “broken”. It is doing exactly what it has to in response to the previous decade of malinvestment. Trying to stop it is not only futile but dangerous. You can’t stop it, but you sure can prolong it.