Bloomberg’s BusinessWeek carried a story outlining a recent report from the International Monetary Fund (IMF) regarding the US foreclosure crisis. Unfortunately for the IMF, the report does nothing but display the organization’s complete ignorance about what’s going on in this country. As most of the ignorant do, the IMF was expecting President Barack Obama to wave his magic bailout wand in a move that would supposedly solve the crisis once and for all.
According to Bloomberg writers Martin Crutsinger and Derek Kravitz, “the Obama administration’s struggle to stem the U.S. foreclosure crisis illustrates how high household debt can slow recovery from a deep recession, according to the International Monetary Fund.” Crutsinger and Kravitz go on to detail how the IMF is lamenting that only a 1 million of the projected 4 million distressed homeowners in this country have received any kind of assistance from the administration’s bailout program known as HAMP.
Truth be known, HAMP was destined for failure one way or the other. As stated in the Bloomberg report, the majority of the money set aside to help distressed homeowners has not been put to use due to tight eligibility restrictions. That indicates the powers that be finally understand it’s not enough to simply give distressed homeowners more money if eligibility requirements don’t show they can afford to stay in their homes. Doing so only prolongs a problem that will get worse over time.
By the same token, the Administration has been trying to loosen lending requirements since the beginning of the year in an attempt to get that money into more hands. But if they succeed, they’ll be allowing distressed homeowners who cannot afford their mortgages to stay in those homes longer. Either way, HAMP fails to do what it was designed to do. The Administration sees that and has been trying to encourage Fannie Mae and Freddie Mac to get on board with a principal reduction program which came out of the foreclosure settlement back in February.
In theory, reducing principle for distressed homeowners would stimulate the housing market and return some value to it. Fannie Mae and Freddie Mac are not necessarily in agreement with the Administration on this one.
Crutsinger and Kravitz write, “Edward DeMarco, the federal regulator for Fannie Mae and Freddie Mac, has opposed offering principal reductions, despite pressure from lawmakers.”
If nothing else, the IMF report details the reality that those at the top of the organization need a refresher course in basic economics. Their assessment of the mortgage crisis correctly pinpoints the cause as being the amount of household debt the average American holds. But they are incorrect in their assessment that government funding is the solution. Common sense dictates that it cannot be.
The government solution will not work because, by definition, the government’s funds come from the people it taxes. If the taxpayers are already overwhelmed with so much household debt they can’t afford their mortgages, where on earth does Washington and the IMF expect them to get enough money to contribute to a tax system that supports government bailouts? When that tax revenue doesn’t come in, Washington will simply print more money which will devalue currency, further erode the economy, and make it more difficult for distressed homeowners to get caught up.
It’s economics 101.