Bernanke sees more house price drops

Reuters – March 04, 2008

Bernanke:

"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure" than reducing interest rates on troubled home loans, he said.

Ok, so who gets the loan reduction? Everybody in the country with a mortgage? Only the people who are upside down? Only the people who can’t afford to pay? Only the people who are upside down, and can’t afford to pay? How about people whose houses have not decreased in value, but who took out negative amortization loans with no downpayment? I picture a class action suit with millions of people suing every lender who arbitrarily chooses certain groups of people to bless with equity, while holding the rest to their contracts. I also see share holders suing for the same reason. And I see a future where nobody wants to put any money down because the less they have in their houses, the better off they are. Take out Home Equity Lines of Credit and spend the equity on trinkets as quickly as possible, because when the music stops, you don’t want to be the sucker with equity in your home.

The government has no answers. This is scary. This looks like a solution that might be forwarded by some halfwit citizen who is interviewed on the street by the talking head on the nightly news. The government would do the country a great service by not making really stupid suggestions. As a matter of fact the government would do the country a great service if the message was “you got yourself into this, you get yourself out,” the same message that any decent parent tries to teach his kids. The Fed could still supply liquity to prevent unnecessary bank runs, but that’s it. Stop making the problem worse by sowing confusion and false hope. The way it is being handled, this problem could be the end of the US as a world leader.