STAFF NEWS & ANALYSIS
Obama Pumps a New Housing Bubble
By Staff News & Analysis - April 04, 2013

Obama administration pushes banks to make home loans to people with weaker credit … The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place. President Obama's economic advisers and outside experts say the nation's much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession. − Washington Post

Dominant Social Theme: No homeowner left behind.

Free-Market Analysis: It's happening again … In the late 1990s, credit was screwed down in the US, creating in the tech bubble and bust. In the early 2000s, the Fed kept rates so low that some homebuyers actually received offers of remuneration were they to take advantage of credit offers.

There was a lot of talk early on during the financial crisis about the Fed's too-low rates. But all that died away with Ben Bernanke's various quantitative easing programs.

It was a kind of "shock and awe." What Bernanke had decided to do was so outrageous that it made low rates pale by comparison. When there are reports of Bernanke writing checks for up to US$16 trillion, it is hard to summon a great deal of interest in discussions over too-low rates.

And no doubt, this is what the Obama administration is counting on – though why they would seek to repeat the mistakes of the earlier 2000s when they are still fresh in the minds of many is a puzzle. But it seems the administration is going too push ahead.

… Administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs − including those offered by the Federal Housing Administration − that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today's low interest rates, among other steps.

Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.

"If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from," said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.

Administration officials say they are looking only to allay unnecessary hesi-ta-tion among banks and encourage safe lending to borrowers who have the financial wherewithal to pay.

When reading the last paragraph of the above the term "famous last words" comes to mind. Everything about the US economy at this point is not just distorted but distorted cyclically. Distortions are countered with more distortions until the inevitable collapse takes place.

The solution to prosperity is getting government planners out of the way. The market itself and the Invisible Hand need a few years to reacquaint themselves with the economy which thanks to endless central bank stimulation has never unwound.

We don't think the economy is "recovering" anyway, so the chances of the new program doing a great deal of damage is slim. What is more bothersome is its arrogance and determination to repeat past mistakes even when they are widely acknowledged. In a sense one gets the feeling the administration simply doesn't care.

After Thoughts

Perhaps that's even more frightening than the policies now being recycled.

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