Subprime solutions

After the subprime mortgage mess emerged some months ago, the treasury secretary Hank Paulson refused to interfere. What was happening was a self-correcting free market at work. Intervening would be un-neoliberal and protectionist. The economical laws would sort out and clean up the mess themselves.
By the end of August, under pressure from Democratic politicians, Paulson was forced into a modest initiative in favour of the more prudent subprime borrowers, those who would have been able to pay their loans if the crisis would not have happened. They would receive help via a government-sponsored program.
With the crisis showing no intention of coming to a stable end, the treasury secretary has come up with a third approach. At first, the mortgage-holders will be divided into three groups, varying from those who can pay their dept anyhow, over those who ‘deservedly’ got their loan, to those who could plainly not afford the houses they occupied. Only the middle group would get help under the latest approach. They would get a debt-resettlement. The Treasury claims that under this program, there would be only winners, on both sides and it would not involve public money. That’s more than triple win.
However, questions remain. If this solution has only winners, why couldn’t have the market come up with it itself? An answer to that may be that the market is not transparent and that the government thus has to co-ordinate. Moreover, a side-effect of the interference of the state has as an implication that mortgage servicers get some legal protection against investor lawsuits
Other questions remain unanswered. Firstly, does this government interference not simply prolong the subprime mess? Shouldn’t we just let hard economic laws bring a hard but clear new balance? Secondly, governments meddling in private contracts may create an unwanted precedent. Thirdly and lastly, the impact of the new plan may well be very limited and modest.

As I perceive it, Paulson has put himself in a difficult position. As a neo-liberal he doesn’t believe in state intervention in the economy. However, here, he realizes that the market does need government support. In that way, he distances himself from his principles. On the other hand, his interventions that are contrary to his principles, are not enough to save the economy.

Sarah Struyf

http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=348876&story_id=10251261