Recipe for Destruction

Written by Fritz on March 12th, 2009

New York Governor David Paterson writes yesterday in the Wall Street Journal:

What is sometimes lost in the public discussion of our current economic crisis, amid the $787 billion stimulus package and the multibillion dollar bailouts of banks and insurance companies, is the root cause. The economic downturn began as a mortgage crisis and will not end until we solve that problem.

What is usually lost in the public discussion is the real root cause…

Here’s a government recipe for distorting (destroying?) the marketplace:

  • Start with the CRA instructing banks to do what they otherwise wouldn’t do.
  • Enable community organizers to stage protests or initiate lawsuits that pressure banks to provide loans to the unworthy.
  • Provide a path to offload the questionable loans by creating a quasi government bank to bundle them as securities.
  • Call the securities triple A and feed them into the market.
  • Blame the market and demonize the banks when the real contents of the securities are discovered.

Why is anyone surprised by the result? The path of least resistance is just another government induced moral hazard.

And now Mr. Paterson wants to force the banks to renegotiate their contracts. I’m guessing none of the re-negotiations will favor the banks.


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