Government Intervention for Dummies

There’s risk in everything we do. The cost of that risk is priced into everything we buy. The less risk we assume for ourselves, the more we pay for things – because we’re paying someone else to assume our risk. The more risk we’re willing to withstand the less we pay for stuff.

A good example is a mutual fund company – some mutual fund companies have high sales charges because their funds are only sold through advisers who help us manage our risk. Other mutual funds have small or no sales charges – but those funds are not sold along with an advisor to help you manage your risk. If you chose the no-fee mutual funds, you’re willing to accept the risk that you might choose a fund that’s wrong for you. If you choose a fund with an advisor, you’re admitting that you want someone to help you invest your money.

Well, now the President wants to manage our risk for us (Wall Street Journal). Two years ago, people bought houses at historically low interest rates. Since the interest rates were historically low, a rational person with even a cursory knowledge of how interest rates function would have to figure that interest rates are bound to go up. And now that rates have gone up – unsurprisingly – homeowners are all standing around with their mouths wide open and asking “how could this happen?”

The President wants to freeze interest rates for five years – taking the risk out of variable rate loan. The thing is, those mortagage companies gave those loans out, assuming the risk that rates would rise, accepting lower profits and anticipating increased revenue in the future. I didn’t hear anyone calling to bail out mortgage companies, nor was there a call to freeze interest rates before they sank even lower.

So now the President is going to freeze rates. And freeze means rates won’t go up or down.  I included “or down” for a reason – when interest rates fall (and they will fall at sometime in the next five years), who wants to bet that Democrats will be screaming that whoever is President at the time should unfreeze interest rates so homeowners can take advantage of that lowered rate?

Well, Hillary Clinton said President Bush was “asleep at the switch” during this next new “crisis” the Democrats need for an issue and John Edwards said we should freeze rates for seven years. High interest rates won’t last for five years, let alone seven years – the prettiest women in the campaign are just trying to squeeze out more publicity before the President drains it today when he announces his plan.

But, to my main point; if government is going to take risk out variable rate mortgages, someone is going to pay for that risk. It won’t be the mortgage companies because they’ll pass their costs on the consumers, it probably won’t be the people who benefit most, the idiots who get their investment and homebuying advice from CNBC. More than likely it’ll be the taxpayers – and the responsible people who buy homes knowing full well what a variable rate mortgage does. There’ll be higher fees for mortgages and of course government guarentees to entice mortgage companies to go along with the President’s plan which will only end up costing taxpayers.

The President’s solution is a short term fix to a bigger problem; the perception that government can solve all of our problems and that government should always be ready to bail out the morons.

Category: Economy, Media, Politics