Market Failure

Today the Washington Post reported that the government’s effort to help struggling homeowners is a failure. The program, which was intended to help restructure 400,000 mortgages, has only attracted 312 applicants since it’s October launch because “it is too expensive and onerous for lenders and borrowers alike.” That is less than 0.08% of the goal, which seems to be really really bad. That’s not even a 001 batting average. And to make matters worse, these are only applicants. Presumably not all of these will be approved. Let’s hope not, since it was unscrupulous lending that helped get us into this mess.

The Department of Housing and Urban Development blames congressional micromanagement, which is entirely possible. I’m inclined to believe that HUD Secretary Steve Preston is correct about this. In any case, assigning blame is of secondary importance. We need a plan B, and quickly.

Part of the problem seems to be that there are onerous regulations to make sure that the money isn’t misspent and doesn’t go to waste. If only the original $700 billion grand unification bailout had been so cautious. There seems to be an inverse relationship between the size of the bailout and the strictness of the restrictions. If this is so, then homeowners would benefit by somehow aggregating themselves into groups that could carry out their own internal monitoring and support. I discussed something like this about a month ago and rather than repeating myself, I’ll just encourage y’all to take a look.

Now, I’ll say again, that solving the housing crisis is a bit above my level of qualification. However, I hope that by providing a model that has already worked in a somewhat related situation, that people who actually do know this stuff can see if there is anything useful in my hare-brained scheme. Fortunately, Robert Wright, who I quoted yesterday, somehow got wind of that and seems to not be terribly offended by how I used his words. Perhaps he’ll drop in again and grace us with his perspective as a financial historian with expertise in investment bubbles.

Would investment cooperatives help us find a soft landing here? I don’t know, but it seems worth a try.

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