Friday, February 8, 2013

My letter to the NY Times: The Fallacy of Government as Savior of Markets


Re: Case Offers a Peek Behind the Curtain of a Security

Dear Sirs:
Floyd Norris makes the preposterous claim that the government's PPIP program saved the Mortgaged Back Securities market by its $18.6 billion handout ($18.6 BILLION!!!!) to nine politically connected money managers for the purpose of buying risky mortgaged backed securities from a supposedly frozen market. This vast amount represented 75% of their investment and is nothing more than a gift of free money with which to take undue risk. (Otherwise the money managers would have invested their own funds in the first place and not had to share any profits with the government.) But the big picture is that PPIP is nothing more than a government cover-up of its own failed policies. The MBS market was overblown due to government's intervention into the mortagage market and the Fed's intervention to drive down the interest rate. This created massive malinvestment in mortgages that spilled over into the MBS market, eventually creating uncertainty into the real worth of most MBS's. A market is never "frozen", but potential sellers may be reluctant to invest more money or sell at a loss. The PPIP program created classic moral hazard in that the money managers were willing to offer higher prices for risky MBS's because they had to put up only 25% of the money. Let's get over the idea that government saved anyone but its own reputation.

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