Cramdown: clinging to a bad idea

Sometimes when politicians get their teeth into a bad idea they just hang onto it no matter how plausible the arguments against it, no matter if it starts to taste bad. An example is the idea of giving bankruptcy judges the power to reduce the principal and/or interest on mortgage contracts. For starters, this would be yet one more contract/agreement that someone from the government can simply abrogate at will -- making it more difficult to make agreements, to make plans, to be able to trust people to do what they say they will do, thus breaking down a little further what is perhaps the most essential element of a society that has any hope of being reasonably free, the ability to trust somebody who is not a direct relative or a member of your clan or tribe.

As this Register editorial explains, it would also quite predictably raise the cost of mortgages by introducing one more element of risk for the lender. Lenders deal with risk by raising the price -- either requiring a larger down payment or charging a higher interest rate or both. This is a terrible idea, but the Obama administration is committed to it, it has passed the House, and though it's running into resistance it is likely to pass the Senate.

To make it worse, it just wouldn't help that many people. But the people who would be hurt the most would be low- to moderate-income people or first-time homebuyers who don't have any equity to draw on when looking at a required down payment in the $40-50,000 range. How it ever came to be a part of our culture that people thinking that giving more power to people in government can be equated with com[passion is one of the great mysteries of our time.

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.