Increasing Uncertainty, Drawing out the Pain

One of the more egregious aspects of the homeowners’ bailout-plan is the provision to allow bankruptcy judges to rewrite mortgages (the bluntly named “cram down” provision). As Alan Reynolds explains:

Any plan that compels mortgage holders to reduce the amount of money they are owed must in turn reduce the value of mortgage-backed securities held by banks, insurance companies, pension funds, Fannie and Freddie, and the Fed. By injuring the balance sheets of potential lenders, a cramdown would also injure potential borrowers. The needless threat of inviting judges to rewrite mortgage contracts at whim helps explain why bank stocks generally fell on the plan’s announcement, while financial shorts rose.

It was this sort of mischief-making that candidate Barack Obama railed against Hillary Clinton for suggesting during the campaign. In a system in which lenders won’t lend, zombie banks are a major concern, and asset values are uncertain, it’s hard to imagine a worse move. (It is ironic that the U.S., which has lectured other countries about sound economies depending on the rule of law and property rights, is now flagrantly violating both willy nilly.)

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Increasing Uncertainty, Drawing out the Pain

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