Tuesday, September 09, 2008


Mortgage Bailout

Regarding the Treasury's bailout of the home mortgage giants Fannie Mae and Freddie Mac, I have nothing new to offer in the way of factual details of the operation. I accept Treasury Secretary Henry Paulson's statement that failure of these two institutions would have had unacceptable consequences, not only to the US economy but to the world as a whole. Foreign national banks were starting to sell the mortgage securities, as it was getting too risky to keep them. The whole thing was about to escalate into a meltdown of the world-wide business of lending money, not only to persons buying homes but to businesses generally, eslpecially small businesses.

So, the US government acted in a way to prevent a collapse of lenders everywhere. This action undoubtedly will have a major effect on the world economy. To me, this is a time when I have to admit that I was wrong in some of my previous posts. I asserted that there was very little if anything that our government could do to control the economy and in particular to ward off a recession. In my defense, I was thinking specifically about tax policy. I still believe that the rate of taxation has very little to do with the health of the economy. Cutting taxes does not appreciably spur the economy. However, using tax money to prevent the collapse of the home mortgage industry certainly does ward off a big, big recession.

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