Cramdowns Ejected – Good Sense in the Senate?

Now that it appears that mortgage cramdowns are going to be stripped out of the housing bill in Congress, let’s talk about why they were a bad idea in the first place.

Yes, I know that bankruptcy judges re-write credit card debt all the time.  This is the argument that Elizabeth Warren, the chief TARP watchdog, used yesterday in her statements to Congress.  Perhaps someone ought to point out to Ms. Warrent that credit card interest rates are in the 20% range, and ask her to consider how much of that high interest is due to the additional risk credit-card issuers have to take on because bankruptcy judges can re-write their contracts with their borrowers any time they like.

The economy functions based on trust.  No trust, no economy.  If I don’t trust the guy I’m dealing with, then I have to borrow that trust from being able to count on stable financial arrangements, like contracts, being enforceable as written.  If I can’t trust those contracts, either, then I’m just not going to do business.  What’s the point?  I could be taken advantage of at any time.

Don’t want to pay me back if I lend you money?  Hey, no biggie.  Let the judge just write off your debt for you.  Why would a lender be willing to lend under those circumstances?

And the answer is – very good, you there in the back – they won’t.  Or, more accurately, they will, but they will cover their butts by raising interest rates so they can make sure that those of us that WILL pay them back can cover their losses on the ones that won’t.  This is basic economics.

Then, when lenders raise their rates, the government can step in again, this time to stop rate-gouging, or whatever, and within a fairly short period of time the government will be the nation’s banking system as well.  And won’t that be better for everyone?

Once again, the government is contemplating action that will benefit a few people at the expense of everyone else.  But then, this is what large, centralized bureaucracies do.  It gives them life, because they never, ever run out of problems to “solve”.

Count me out.  Kudos to the Republicans (I can’t hardly even write this sentence) and the couple of Democrats that could see this, and refuse to pass the bill with the cramdowns in it.

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