The Politics of Debt

According to an AP article dated August 29, Federal Reserve Chairman Ben Bernanke proposed the most creative solution to the foreclosure crisis to date: “Let’s do it all over again.” Of course those are not his words, God forbid a Fed Chairman should speak clearly! Instead, he “suggested that policymakers look for ways to encourage a wider range of mortgages geared for low income and other borrowers who have been hard hit by the housing slump and credit crunch.”

Hey! That’s such a great idea! Let’s create some even more creative mortgages. After all, when the new bomb explodes it is going to explode in the face of a new administration and the borrowers will not know what on earth hit them. At least you can tell that, unlike most politicians from both sides of the aisle, he understands the financial intricacies of the current financial crisis. His solution to the credit crunch is to create more liquidity by ways of creating new borrowing instruments.

“The Congress might wish to consider FHA reforms that allow the agency more flexibility to design new products and to collaborate with the private sector in facilitating the refinancing of creditworthy subprime borrowers facing large resets,” Bernanke said.

This is helicopter Ben at his finest. His solution (if you haven’t had your second cup of coffee yet) is to use this crossroads to force new legislation that will allow for even riskier loans. This liquidity, however, will come at the price of inflation in the future (can you say new housing bubble?). This throwing of money from a helicopter may solve the issue in the short run, at the price of producing one of the most destructive effects on the economy, namely, the destruction of the value of money.

This devaluation transfers money from savers to spenders. At a national level, this may mean that those with fixed rate loans will see that the value of their loan relative to the price of their home will shrink dramatically (which sounds like a good thing, right), however, the price of their home relative to other goods will be the same or lower. As an example, if your home is now worth 300,000 lead painted Chinese toys, after the effect of inflation it will still be worth the same amount of Chinese toys, however, you will only owe the value of those toys in the past, when you signed off your fixed rate loan.

The creative measures of Mr. Bernanke, however, seem to point to the creation of “perpetual loans.” These perpetual loans are not called such, however, when you lease a vehicle instead of buying it, for instance, you are agreeing to enter into a perpetual loan for as long as you need the vehicle or you decide to buy one. Although leasing may be a reasonable alternative in the case of depreciating goods, in the case of homes it creates the illusion of ownership and brings with it all the responsibilities of ownership without any of its benefits. In a way, the former owner becomes a caretaker of the house belonging to the financial institution. The funny thing is that they will not pay you for taking care of their real estate, but will actually charge you hefty fees and interest for doing it.

If you think that’s ridiculous or impossible, just take a look at the social structure of most of Latin America, where the ownership of land and the relationship of tenants and owners is much more similar to Feudal Lordship than to modern individual ownership.

You can read the whole article here.

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Tags: America, credit crunch, Economy, Fed, Federal Reserve, federal reserve chairman, federal reserve chairman ben bernanke, fixed rate loans, housing bubble, inflation, latin america, liquidity, mortgages, policy, subprime borrowers, United States, value, value of money