The mortgage-backed securities price drop reflects the natural tendancy of people to be sloppy with other people's money. In this case, it was primarily the mortgage brokers shoveling out other people's money to borrowers and hedge funds asking not quite enough questions about who is monitoring the borrowers before shoveling their investors money to purchase the loans. These capitalist swashbucklers should be lionized, not villified. If the US economy is not utilizing all of its productive capacity, we need to find some way to nudge it to work harder. If prime borrowers have borrowed all the money they want, then the extra money to get the economy moving has to be lent to subprime borrowers or monetary policy will be pushing on a string like in Japan where the nominal interest rate has been zero for a while and the real interest rate negative.

So expect the extra money to go into irrational stocks or to risky borrowers. If it doesn't go to them and Congress isn't swift enough to write everyone another $300 check, then we will just have idle capacity. Without a housing boom, instead of an overhang of houses that would be in danger of being foreclosed, we would have fewer houses, more unemployment, lower wages and lower GDP. We should continue to figure out ways to get money into the hands of people who will spend it even if they are speculators, sub prime borrowers, exuberant speculators and intrepid entrepreneurs.

Personally, I am in favor of subsidizing all consumer borrowing so that the benefits of rate cuts don't accrue disproportionately to creditworthy borrowers. But whether it's health care, green cleanup, space settlement or defense that you think needs more money spent on it, to just leave capacity idle is in my opinion even worse than spending it on my last choice.

Now let's get this straight,

The Conservative's despise government spending, having
rolled around in the muck of Grover Norquist's Tax Reform movement.

The Conservative's decry the lack of personal responsibility engendered by public welfare payments

But You are speaking for bailing out billionaires?

I would recommend spending government money subsidizing housing for prime borrowers, roads, and public health. I'd vote for smaller government by starting with lower taxes and higher earned income tax credits, government asset sales and funding the social security trust fund and distributing it to the citizens. But yes, I would rather have the money spent bailing out billionaires if that's really the only choice we have (and the Federal Reserve only has a couple of levers it can pull) so if interest rate decreases bail out billionaires, let's lionize them for putting people to work and risking it all. I think it will be more likely that we create new billionaires with easy credit than bail out the ones that bet heavily on sub prime mort-gages, but what is so bad about giving someone a house who can't afford it? The billionaire who owns the house after foreclosure still has to sell it at a loss even if the short term interest rate drops to nothing. The person that occupies the house after foreclosure whether renter or new borrower can only be coaxed into it at a price that attracts one more person into the market. That's more houses for more people. What's wrong with that?

what you are arguing for is inefficient use of capital and labor.

it also seems to be arguing that markets can't efficiently allocate either.

If you want efficient low cost housing, it's giant apartment blocks.
That's what it is. That's why they build enormous housing
wether as condo's or aartments or HUD Housing towers
in NY, Chicago, San Francisco. etc...

Detached housing is far less cost efficient and operating
efficient then a 40 story structure.

If roofers find themselves unemployed within a few weeks
they will be moving to find work, or switching to auto repair
or pumping gas or serving as crossing guards, that's useful
application of labor.

If Billionaires lose their butts in subprime loans, maybe
that money will go into technology research, or
efficiency investment, etc.

I've always thought the liberarians had turned into GOP
stooges, it now appears they are just stooging for Wall Street.

Hmmm. If the alternative is tight monetary policy and high unemployment, high underemployment and low wages, I am surely guilty as charged. I think everyone who advocates hard money to punish the speculators is advocating cutting off their face to spite their nose. Come in to the light, non-librarian and show us you are not a stooge for a Wall Street short seller.

If Billionaires lose their butts in subprime loans, maybe
that money will go into technology research, or
efficiency investment, etc.

The billionaires thought the sub prime rates were efficient. They were wrong. That still doesn't give any government official the right to take more of their money and give it to someone else.

Most know that renters don't take care of the rental property as well as a home owner would. Essentially giving people houses who can't afford them is not much better. More and more subprime borrowers are walking away from their homes because they have little if any equity in them. Your proposal would only increase the problem.

As to the MBS debacle. It wasn't an oops I made a mistake investing in subprime MBS. The banking and financial industry purposely sliced and diced risky loans in with good ones, had the tranches rated highly by Moody's and S&P, and then hid that fact from the final buyers such as pension funds and mutual funds. Those financial institutions should be allowed to fail.

The easy credit mindset you promoted is what caused this mess in the first place because they assumed that Uncle Sam would bail them out.

To sum up, government should be out of the credit market altogether. This would create a more efficient market.

actually the Billionaires thought the subprime rates were
efficient.

They were wrong, Then the Fed is taking money from
the ones who were right, and are giving it to the Billionaires.

This is Bush-Era Robber Capitalism. Steal from the
thrifty, Steal from the Careful, Reward the slacker
Rich.

The Dollar is falling against the Euro, The Dollar is falling
against Gold. Anyone holding Dollars has been robbed
by George Bush and Ben Bernanke

There's a difference between those who take informed, speculative risks, with an eye to making them pay off, and those who rent-seek. Protecting the losses of the risk-takers is a perfect way to turn them (as a group) into the latter.

I work in the industry, so I've got a lot of mixed feelings about it. I forewarned my superiors at work about the circumstances and possible motivations a couple of weeks ago. This is a gift to those who took out crappy mort-gages. I've personally analysed mort-gages. I've seen a lot of things. Even things that made me want to cry. And that was in a mort-gage pool from the 99-01 timeframe, when the industry was just learning the things they would use in 04-06.

Don't be surprised if there's another rate drop of 25 bps, likely by the end of the year. I'd put the predominance of likelihood on the October meeting to help those whose rates are resetting, otherwise we'll have a holiday present in December to run up the markets and give everyone a warm, toasty sense of well-being.

January may be rather frosty indeed.

of ocurse fallinginterest rates are killing the
Dollar.

The Dollar is at record lows against every major currency
as the trade deficit begins racheting in.

The Saudi's are dropping their dollar peg for their
interest rates and will likely soon enough
drop the dollar in favor of a currency basket.

But, Bush and Bernanke will try and help out
the McMansion crowd and Wall street.

Yeah, if they lower interest rates, it's to help out the rich.

If they raise interest rates, it's to hurt the poor.

And if they leave interest rates alone, it's because they're too busy looting the country to deal with the problem!

Sam, keep in mind that speculation is its own reward and punishment. I see no reason to lionize it when the market does a much more efficient job of rewarding good speculation.

Second, subsidizing subprime loans is worse than pushing on string. An economy can rapidly build up bad risks this way which in my view is worse in the long term than the mild benefits from a little more economic activity.

Ultimately, I don't see the point in encouraging economic activity for its own sake and this proposal strikes me as being a variation of the Broken Window fallacy. Namely, you are encouraging people to make suboptimal economic decisions for more economic activity. For example, the government would be hiding a considerable portion of the risk. Further, all that spending would immediately translate into government borrowing, which causes further problems.

You want more prime borrowers? Then reduce the supply of government debt. Don't add to the problem with counterproductive measures like this.

Yeah, anonymous, apartments are "efficient" - but who wants to live in one, unless perhaps they live in NYC? (Sure, people who can't afford anything else ... but their aggregate demand, if it really is more efficient use of the property, should create apartment development via market forces.)

Many things are more "efficient" in some sense than being the things people actually, demonstrably want.

I don't agree with Sam, however, that monetary policy needs to "nudge" people to work harder - but my disagreement is only that the State's monetary policy shouldn't be involved. Sub-prime loans aren't strictly, at least in this conception, state monetary policy.

(Now, if they "regulate" them, as there has, I think, been talk of, that would be state policy, and probably harmful, like most post-facto overreactions.)

(I'm also deeply unsure of the entire economic theory of that last paragraph; a price-bubble followed by a collapse isn't what economists typically consider the way to build GNP and increase wages and employment in the long term, is my understanding.)

Repealing the Federal Reserve act to have an "efficient market" probably wouldn't get too many votes. I think the basic idea of keeping the money supply as high as possible consistent with low inflation since 1981 to spur economic activity gets an A+ over the decades for making the US the most exciting and wonderful place to live (or least worst) notwithstanding Michael Moore and Al Gore's criticisms that we are heartless and dirty. Having tight money when core inflation is tame hurts everybody. So I think it's right to praise everyone who spent the money to make our economic engine rev, not single out a class of spenders and call them villianous when all they were doing is responding to the incentives of the Federal Reserve. Those incentives have a most excellent track record.

If Michael Moore is praiseworthy for getting people health care in Cuba illegally and making a profit on his movie in the process, then some of the mortgage brokers who by hook or by crook got risky borrowers into houses should also be praised. Obviously if the brokers or bankers lied about the terms to the borrowers or the investors, that's fraud and they are immoral and destructive in addition to criminals, but if they told the truth about the terms and accepted the risky borrowers on poor documention with full knowledge of the borrowers and investors, they should be commended even if they made a profit and the borrowers and investors losses.