The Best Laid Plans of Mice and Governments Often Go Astray

The founders of the United States were brilliant human beings who developed and left us a framework for existence that we continue to ignore to our detriment.  The framework I am talking about, of course, is the Constitution.  In the current economic crisis, the regime in D.C. is ignoring it by devising new ways to “stabilize” our economy.  The harmful effects of which are already appearing.   

According to Bankrate.com, average mortgage rates on 30-year fixed home loans have increased more than one half a percentage point to 6.74 percent in the last week.  This represents the largest weekly increase since April 1987, when the 30-year rate rose 0.84 points.  For the average borrower with a $200,000 loan, this means they will pay $1,296 a month – an increase of $100 more a month and $1,200 more a year than the same loan would have cost just a few weeks ago.

But, weren’t the policies enacted by the Bush Administration, Federal Reserve, and Congress supposed to “unfreeze” the credit markets and relieve the pressure on our financial system so that it could work again?  The answer is yes, but once again, the unintended consequences of federal actions have prevailed.  You see, in order to fund Washington’s rescue of the economy and the new government debt guarantees, the Treasury is selling a bundle of new Treasury bills to raise money (more debt).  Treasury has to offer higher interest rates to sell these debt assets and since mortgage rates move in step with 10-year Treasury yields they have risen with the actions of Paulson, et al.

Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for his own firms – Fannie and Freddie, when they seek to sell their securities.  To compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages.  As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie bailout was launched.  Naturally, this was not the government’s intention, just the consequence of its actions.

Rates are expected to decline as credit availability increases due to the liquidity added by the feds.  This won’t help those homeowners whose adjustable rate loans are due for adjustment in the near term.  And before we get too excited about easy money again, let’s not forget that in the long term the Federal Reserve will have to raise rates, probably significantly, to fight the inflation that will emerge as a result of the Treasury’s spending right now.  What this situation will mean for the foreclosure rate in this country is clear – it will go through the roof.

If only our leaders would read the Constitution before they take an oath to it.  They would learn that it does not allow the federal government to transfer wealth, bailout industry, or own banks.  The founders knew that to give this authority to the politicians would infringe on the rights of citizens and screw up the economy.  Recently, while reassuring the American people that the United States was not fundamentally changing its economic system through all of this government intervention, President Bush said, “democratic capitalism is the greatest system ever devised.”  I suggest the President heed his own words and let our free market system fix itself.

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