Tuesday, December 04, 2007

Amen Brother!

My Milton Friedman side has been rather insulted by the talk of bailing out people for being idiots. This is capitalism, Darwinism applies, I don't want my tax money going to people on the basis that they are stupid. In any case the WSJ has a great editorial on this subject today. I couldn't agree with it more.

A taxpayer bailout of distressed homeowners would be expensive, unfair to the vast majority of homeowners and renters who have made prudent financial decisions, and set a troubling precedent that would invite reckless behavior in the future. What's more, a bailout will not stop the inevitable correction in home prices, and is unlikely to prevent the associated economic repercussions.

The primary argument for a taxpayer bailout is based on a myth -- that subprime borrowers are falling behind on their mortgages because interest rates on their adjustable rate mortgages have spiked, making their monthly payments unaffordable. In fact, the vast majority of delinquent subprime borrowers are still paying introductory teaser rates (about 8% on average, a below-market rate for borrowers with checkered credit histories). In other words, for most of these borrowers, their monthly payments have not yet gone up.