Responding to an article that appeared in the Boston Globe about the need to address foreclosures, I wrote the following post on 9/24/08:
While I agree that some carefully selected measures to help debtors may be successful, they are not without some major risks and long term issues. For one, this would set a precedent for the government to be able to step into a contract where one party is not able to perform, tear up a perfectly legal contract (whether it’s perfectly moral is not the question here), and restructure the terms of the contract, arguably just to score some votes come election time. To do that you would have to have the consent of the creditors, or this country would certainly be going down the socialist road for sure.
It appears for now that the gov’t does in fact have the consent of the creditors by the virtue of the fact that the gov’t is the majority owner of the banks.
This is David Goldman’s perspective at Inner Workings:
Take sub-prime mortgages, for example. After hitting a low of $32.5 in mid-November, the ABX 2007 vintage AAA index of sub-prime mortgage-backed securities rose to $45 at the end of December, before tumbling back to $37.5 today. The proximate cause for the reversal was Friday’s agreement among Congressional Democrats to “cram down” mortgage payments in the event of bankruptcy, a prospective change in law that in enacted will impair mortgage cash flows.
It increasingly looks like that the bailout is not merely a passive investment but a nationalization in the true populist sense of the word.