Monday, March 09, 2009

Cram the cramdowns

The radicalism of what is emerging as Obama's program is shown in part by the proposal to give bankruptcy judges the ability to reduce the principal on mortgages. I suppose you could argue that the sanctity-of-c0ntracts clause in the constitution was compromised long ago, when bankruptcy itself was allowed, in the early 1800s. One forgets that it was controversial at the time. But eroding it further by allowing judges to change the terms of contracts at will, as this Register editorial explains, would have approximately the opposite of the ostensibly desired effect. Knowing that a bankruptcy judge could alter a mortgage, banks and other lending institutions wold simply charge higher interest rates and demand larger down payments. This would dispropportionately affect lower-middle-income people and first-time buyers.

I suppose one could argue that since one of the reasons for the financial meltdown was government-mandated more "affordable" mortgages and the undermining of lending standards, that making mortgages more difficult to get might not be such a bad idea. But it's not what Obama claims to want and not what mnost of those in favor of giving BK judges this power claim to want. But then it's a fairly standard pattern. Most government interventions, perhaps especially those aimed at helping the poor, end up hurting the poor most of all. Governments generally produce the opposite of what they promise.

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