I say let him! Fresh off a victory lap in Davos with Nouriel Roubini and Nassim Taleb, Niall Ferguson lights up the Financial Times with a little proposal of his own. First he suggests nationalizing the banks without nationalizing them, which has plenty of sense in it:
The second step we need to take is a generalised conversion of American mortgages to lower interest rates and longer maturities. The idea of modifying mortgages appals legal purists as a violation of the sanctity of contract. But there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly during the course of the 19th century governments changed the terms of bonds that they issued through a process known as “conversion”. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
Another objection to such a procedure is that it would reward the imprudent. But moral hazard only really matters if bad behaviour is likely to be repeated. I do not foresee anyone asking for or being given an option adjustable rate mortgage for many, many years. The issue, then, is simply one of fairness. One solution would be for the government-controlled mortgage lenders and guarantors, Fannie Mae and Freddie Mac, to offer all borrowers – including those on fixed rates – the same deal. Permanently lower monthly payments for a majority of US households would almost certainly do more to stimulate consumer confidence than all the provisions of the stimulus package, including the tax cuts.
Funny how we haven’t heard in awhile the plan to use the US Treasury’s ability to borrow at 2% to support 4.5% mortgage rates. But does the unexpected up-turn in houses going to contract reported yesterday obviate the need for this plan? I hope not, I could use the cheaper mortgage rates to pay my property tax bill.
Beyond the age of leverage; new banks must arise
Financial Times; February 3, 2009