The Government Is Mentally Deficient

Yesterday there was all this hoopla over the Fed cutting interest rates by a half a point. Today I read an article on how the government plans to expand FHA programs to help distressed home stay out of foreclosure. Both of these events sound like they are good things...if you don't understand our current economic situation and how the country got there. If you do understand these things you'll realize that we have just had two more dumb ideas slapped on the table by our government, which for some unknown reason likes to ignore factual data and research (see Iraq).

The banks have no money. The people who you give your money to for safe keeping, the people who are the main source of money for lending, have no money...the market is illiquid as the they would call it. How did this happen? Well remember 6 years ago when those planes flew into those two buildings in NY? The government panicked as people started freaking out about the events of 9/11 and had to figure out away to keep an already sagging economy from nose diving into the ocean...enter Allan Greenspan. The Federal Reserve, headed by Mr. Greenspan, slashed interest rates to nothing making it extremely cheap for people to borrow money (read: they paid less interest). This caused millions of people to spend like its 1999 because they could spend more and pay less.

Enter the mortgage industry. Mortgage lenders, eager to get in on the huge profits to be made from the rate cuts, started coming up with these "exotic" (read:stupid) mortgage programs to make it easier for people to buy homes and take advantage of this easy credit. Sounds good...it wasn't. A lot of the people who ended up getting homes couldn't REALLY afford them. They got their mortgages on a 2/28 or 3/27 adjustable mortgage that starts out at a low "teaser" rate and then adjusts to reality after the introductory period, or a stated loan where borrowers were allowed to just tell the lender what the earned in income instead of proving it, or interest only loans that make no payments toward the principal balance. The result? Millions of Americans are losing their homes because they couldn't afford them to begin with but bought homes under some rogue lending practice.

Now that people are foreclosing like it's a new dance and mortgage lenders are closing up at breakneck paces, the Fed has stepped in to save us all, but they forgot the saving part. Their move to cut interest rates yesterday is like taking a crack addict to a shoe store to cure his addiction...it doesn't speak to the problem. Cutting the interest rate doesn't help the people who are losing their homes as we speak. At this point they are probably 2 or 3 months behind on their payments and the foreclosure proceedings have already begun. Mortgage lenders aren't going to bring their standards down from panic mode on a half percent cut because, now brace yourself for this one, THEY ARE STILL GOING TO LOSE MONEY ON THE PEOPLE WHO ARE FORECLOSING NOW!!! Oh, but the government has another genius idea to help along in this process.

Let's make FHA the new "Foreclosed Homes Association". Let's lower down payment requirements from 3% to 0% and raise the loan limit from $417,000 to $729,750. In other words, let's turn FHA (who insures mortgages for low and moderate income families) into an agency that insures the same bad loans that got us in this situation to begin with...this will not end well. On a second note, what low income family do you know that can afford the payment on a $729,500 home??!! Exactly my thoughts.

To make a long blog long, the government is painting a red wagon red. They are doing the same idiotic things that got us into this situation to begin with. So while people are at home calculating how the half percent cut in interest rates will help them save money on their new home, that time would be better spent calculating what they are going to do in a year when the house is foreclosed on.