High Risk Credit

Discussion in 'Money Talk$' started by KenH, Aug 26, 2007.

  1. KenH

    KenH
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    High Risk Credit
    By Congressman Ron Paul(R-TX)
    August 20, 2007

    As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

    More inflation is, however, never the answer to inflation.

    The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.

    In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

    The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.

    We’ve been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. While Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets, the world is tiring of marching to the beat of our drum in order to secure their energy needs. The house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.

    As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.

    - www.house.gov:80/paul/tst/tst2007/tst082007.htm
     
  2. TomVols

    TomVols
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    There is an awful lot of agreement on this issue between Mr. Paul and I, but some things he says here are worth pointing out:
    This is oft repeated but I have not seen hard evidence of this. Obviously, some mortgage backed securities are packaged into funds/debt sold, and some of this is sold to foreign (and domestic) investors, but the hand-wringing over this globally just hasn't borne out in what I've seen. I'm open to rebuke, but this media-repeated theme just needs some anchoring.
    True. Thankfully, the plus is that Fannie and Freddie haven't gotten into the fray. The "bailout" could've been a heckuva lot worse, more expensive, and consequentially more destructive.
    The Mortgage Bankers Association's high estimate is that 1 out of every 4 mortgages are ARMs. While this is not inconsequential, why do the media act like this is a tidal wave? No one argues more loudly than me that real estate drives the economy, so I see the downside. However, almost 97% of mortgagors are current, according to the MBA. Only 1.3% are in default. And get this: according to the AP, 30% of respondants said that they would likely buy an ARM for their next mortgage. Despite the fallout, the demand is going to increase!
    Well, the market bought these mortgages, and the market wants more. Unless there are some bona fide cases of predatory lending (and being in the business, I know it goes on enough that it's a potential concern but not enough that it's an epidemic), no one has held a gun to these people's heads. Refi folks have a right of recission. Purchasers have escrow. Ultimately, they have no one to blame but themselves, on balance.

    Aside from these and one or two other spots where Mr. Paul seems to just repeat the talking heads, I wholeheartedly agree with his prescription and analysis. (I'm not as in love with the gold standard, but here again, I'm open to hearing more on the matter). For the most part, I think he does well on the Fin Serv Cmte in the House. I think he would make a good Sec of Commerce or Treasury Sec.
     
    #2 TomVols, Aug 26, 2007
    Last edited by a moderator: Aug 26, 2007

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