Friday, April 24, 2009

How to prevent future housing bubbles

Ok, I know this is far to early to be thinking about this: the government is still hemorrhaging money as fast as it can bludgeon future generations, many large banks have yet to collapse or be nationalized under the strain of enormous gambling losses, and America hasn't even yet seen the massive inflation effects which will inevitably result from all our reckless and ill-advised "bailout" payoff schemes. However, in the spirit of Warren Buffet's "well duh, the way to give loans that don't fail is require 20% down, always" (paraphrase), I give you the simple steps the government could do to virtually assure that the current debacle is not repeated. As a bonus, my steps do not require massive new ineffectual oversight, more enormous wasteful spending, or a complete conversion to a socialist economy, so they are already way better than anything Obama or the despicable scum in Congress are likely to propose.

Step 1: Require that the GSE's (all of them: Fannie, Freddie, FHA, etc.) only buy/give/underwrite loans where the buyer (not sham charities, government, etc.) supplied at least 20% cash for a down payment, and had documented income over the last two+ years of at least 1/3 the purchase price of the home. The real rule might have to be slightly more complicated (eg: small business owners might be allowed to use average documented income over the last five years instead), but that's the basic idea. Other people (non-GSE's) can do the rest of the loans, and charge for risk appropriately. This will supply liquidity for "normal", "affordable" purchases, while not allowing the GSE's to become the entire market, or take on excessive risk chasing profits.

Step 2: Require any securities containing any part of any RE loans not meeting the above criteria to be rated no higher than 'A' by the credit rating agencies (ie: a level which does not permit "safe" funds from purchasing them). No more enormous unwitting sources of funding for sub-prime garbage means much less demand for sub-prime junk, which means the banks will have much less incentive to give out loans they don't think will be paid off.

Step 3 (optional): Require any financial institutions originating any RE loans not meeting the criteria in step 1 to hold at least 20% of the original loan directly on their own books (no off-balance sheet hiding) until maturity. This probably wouldn't be required, but would add an additional check against "risk indifferent" loan origination, in case the banks circumvent the restrictions implicitly created by Step 2.

That's it: simple, cheap, no more sub-prime housing bubbles and subsequent disastrous crashes, while still allowing financial innovation and capitalism. File it away under great solutions which will never be done because they are so fundamentally opposite the political agenda of the current government regime.

1 comment:

  1. Your banking practices would save our economy. But anything that makes financial sense is ignored by our leaders. Sigh...