The sky is falling! The sky is falling! What to do, what to do? So goes the mantra of the Bush administration, all the presidential candidates (except Huckabee) and both houses of Congress, especially those individuals running for re-election.
I am talking about the current subprime, adjustable rate mortgage "crisis." The solution is simple. Just follow the advice of Harvard Professor Gregory Mankiw, who was a former chair of the Council of Economics and do "absolutely nothing." This is a free-market system and will be solved within this system. Sure the economy is going to burp once or twice, and emotionally there will be wailing and gnashing of teeth. But, so what?
Even though the politicians and the bureaucrats are counting on your sympathy and compassion for those poor, innocent, naive borrowers who were defrauded by those big, old, mean lenders, don't let yourself get drawn in.
The real problem is a mix of falling housing prices, greedy lenders making bad business decisions, rising interest rates, easy credit granting policies and impatient borrowers not willing to live within their means.
It is certainly not solely the fault of the big, bad mortgage companies. Sure, they lent money to people who couldn't pay back the loans, but everyone thought the housing boom would go on forever.
Thus the banks would be covered with property worth more than the mortgage; and the lender, if the payments could not be met, could simply sell the home, pay off the loan and walk away with some equity in his pockets.
The last thing we need is for the federal government to come up with a solution, but that is exactly what it is trying to do. One proposal is for the Federal Housing Administration to refinance these risky mortgages for the low rate of 1 percent.