We Need to Do More!

Sen. Chuck Schumer (N-NY) was on CNBC this morning claiming that the Federal Government needs to do more to stabilize housing. He offered a 5-point plan that was very short on specifics. But the fact that Schumer thinks the Federal Government can actually stabilize housing is a pipe dream. The market is simply too big for the Feds to control. Over-priced homes have to correct as Dan Mitchell explains:

“It doesn't matter how low rates go, if you are a financial institution, if
you think the home is worth less than the mortgage or if you're worried
the homeowner is going to pay back the mortgage,” says Dan Mitchell, a
senior fellow at the Cato Institute.

In addition, Schumer wants to drop another $180B in"stimulus" on the economy. This, of course, will do very little good. The sad fact is we have to let housing prices correct to reflect their true value. This will be very hard on many people. However, it is the only way out of this malaise.

The real problems will begin when the Feds get more involved. Now House Financial Services Committee Chairman Barney Frank wants the government to do more. This is not the answer. Markets have to correct and federal involvement will just prolong the problem. Furthermore, they will create reactionary policy that will undoubtedly make life more difficult for everyone.

The Federal Government is a hammer and consequently every problem they see looks like a nail. Our elected officials need to stop panicking and let this situation correct itself. The Federal Reserve is ensuring there is plenty of money in the market (at the risk of inflation), so the chance of another depression is unlikely. Housing prices will eventually get cheap enough that people will pile in (housing sales were actually up in MI last month). Equities will get cheap enough that investors with piles of cash will begin buying again.

Bear Stearns going nearly bankrupt is a good thing. They took more risk than they should have and they are now being penalized for the mistake. This is the beauty of capitalism (brutally punishing the inferior) and why we are the most prosperous nation the world has ever known.