In college I wrote a paper for a Latin American Politics class titled, Barnum & Bailey Circus bailouts. The paper took the position that another financial bailout of Mexico would be a huge mistake and would not be money well spent. The paper was probably a little flippant because I interwove within the framework of the paper some characters with top hats, traveling bands of political circuses, and other outlandish theatrical symbolism. I was trying to make light of what I thought was a circus-like proposal, as well as rely on smoke and mirrors to downplay my lack of reading for the course.
There is nothing funny, however, about mortgage bailout proposals. Hillsdale professor Gary Wolfram has an excellent article in Human Events, titled “Econ 101: The Problem with Bailouts.” Wolfram shows how markets correct themselves, and even discusses the upsides to a now more affordable market:
As Sherlock Holmes told Dr. Watson in “Scandal in Bohemia,” one problem is that we see but do not observe. For every homeowner who loses his home and moves into a smaller home or a rental, there is another homeowner who moves into that home and out of a smaller home or rental.
It would be interesting if the media began doing stories on how much more affordable it is for people to move from rented apartments into owner-occupied homes. The house that used to cost $280,000 and was out of the reach of the young family is now $220,000 and becomes affordable.
If the federal government, including the Federal Reserve, bails out the mortgage industry in some fashion, the market will quickly learn that taxpayers will bear some of the risk of the investments of homeowners, lenders, hedge funds and other market participants. This will result in their taking more risk than is economically justified, encouraging the very activity that led to the situation of declining housing prices and foreclosures in the first place.
But if politicians keep rattling off vague proposals of bailout proposals in the belief it will raise their polls, they may have to think again. In an Associated Press article, J.W. Elphinstone, cites a newly popular online petition, Tax Payers Against a Wall Street and Mortgage Bailout. Furthermore, Peter Viles in the Los Angeles Times, references a Fox News Poll that shows 70% of the public against a taxpayer bailout.
Many of those people have been priced out of the market and understandably they don’t want to support people who cannot afford their homes, many of whom made really bad financial choices. The people against this bailout simply want back in the market, and they understand now the market is correcting itself.