I have to confess to a sordid fascination with the US housing market. The crisis over there is now transforming; it started out with a rising default rate, but it is now sliding into a banking crisis.
As the banks have begun take the hit, many bankers are now putting forward housing rescue plans. The International Herald Tribue produced a particularly stupid one this morning. Howard Milstein - CEO of the New York Bank and Trust - wants the US government to guarantee the principal of mortgages for 15 years. In return, banks would freeze mortgage interest rates on sub prime loans.
Old Milstein knows that this idea does not have a hope of flying if he presents it for what it really is, namely a government bail-out of the almost certainly insolvent US banking systen. Instead, he feigns concern for the little people, in particular those hard pressed new homeowners that ended up with those subprime loans. Milstein says that his strategy would "ensure that fewer families would lose their homes, that fewer neighborhoods would deteriorate because of abandoned housing, and that as a consequence, there would be less downward pressure on real estate prices and property tax revenues".
This newly found social conscience lacks a certain credibility. In the past, banks have shown little concern about the personal consequences of foreclosure. Banks have steadily repossessed unfortunate families who could not afford their payments.
Unsurprisingly, Milstein offers no estimates for the costs of this little scam. Next year, around $600 billion of sub prime mortgages will see their teaser rates disappear. Currently, around 15 percent of these loans are defaulting. Even if this scheme cuts the default rate by half, the US government will end up with billions of defaulting loans on its books.
Yet the cost of this scheme is not the main reason to reject this type of crude bail-out. Once the banks safely offloaded their sub prime loans onto the government, they would go out and start recklessly lending again. They would keep the profits from high risk lending private. Wait a few years, and we would see the same kind of credit difficulties we see today.
So what has this got to do with the UK housing bubble? We are fortunate insofar as we are two years behind the Americans. As such, we have a head start exposing the stupidity and crass self interest behind ideas like this. When our crash really gets going, we will have our very own Milsteins crawling out from the banking system, pleading for a bailout and tarting it up their demands for government assistance with social concerns about the poor.