Wednesday, September 16, 2009

Perpetual Bailout for Banks

I meant to comment on a fact from the September 8th edition of the Arkansas Democrat Gazette. It reported that 86 percent of all new mortgages are guaranteed by the government, and that this was up from only 30 percent just four years ago.

The bottom line is that the government has put the bailout of banks on autopilot as long as numbers like this go on. The mortgage crisis developed because banks were making irresponsible loans- often under pressure from the government. This will only make the problem worse. If the government is backing the loan, why worry about whether or not the customer can pay? During the crisis, banks made bad loans and then sold them to other banks. They did not have to worry about MAKING bad loans, just HOLDING bad loans. Now I guess they don't have to worry about holding bad loans either.

It seems that the government is not going to permit credit markets to function according to free market principles. They are going to do whatever they have to for the money to keep flowing. The certain result: Banks, even stupid ones, will get richer and taxpayers, even smart ones, will get poorer.


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