Thursday, December 4, 2008

Market Failure? Not Quite.

Ben Bernanke wants more taxpayer funds to help reduce foreclosures. Bloomberg reports:

"He called for addressing the 'apparent market failure' where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so."

But this is not a market failure; it is a failure of Ben Bernanke and the rest of the Federal government.

The reason lenders are not modifying mortgages is that they perceive that it is NOT in their best interest to do so. The reason they perceive that it is not in their best interest is that Bernanke and his ilk keep talking about (and in some cases, acting) throwing taxpayer funds at the mortgages.

The banks, instead of making smart business decisions, are trying to position themselves to get pieces of the bailout pie.

Think about it: If someone owes you $500,000 but cannot afford to pay, are you going to rework the mortgage to $400,000 or are you going to wait for the government to give you the whole $500,000? Or wait for the government to provide some "incentive" to rework.

You would do what is in your best interest. If you think government help is forthcoming, you try to get it. Even spend resources lobbying for it.

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