We all know how we got into this economic mess. We spent too much, borrowed with abandon and acted like the bills would never come due. So what's the prescription for getting out? Spending more, borrowing more and acting like the bills will never come due.
When something sounds too good to be true, it usually is. This alleged cure deserves special scrutiny because it invites our policymakers to redouble the very policies that caused the crisis. Congress and the new administration are all too eager to abandon restraint so that we can overcome the consequences of excess.
Take mortgages. The current recession stems from the popping of the real estate bubble, which came about because too much money went into housing. But now the Obama administration and House Democrats are pushing to assure more investment in housing.
They intend to raise the limit on loans that mortgage giants Fannie Mae and Freddie Mac can buy from $417,000 last year to $729,750 in some markets. And James Lockhart, who oversees the two companies as head of the Federal Housing Finance Agency, told The Wall Street Journal they should accept a lower rate of return than in the past in order to help Americans buy homes.
But it's worth remembering where our problems began: with an oversupply of housing. Channeling more funds into the residential sector will encourage more home building, which will worsen the glut, which will push prices down even further and generate more foreclosures, which will deepen the recession.
The sad reality is that the housing sector has gotten too big and will have to shrink. A lot of people who prospered from catering to the inflated demand for housing, from carpenters to real estate agents, will have to find new ways to make a living. That's what the end of a bubble means.
But plenty of people in Washington are nostalgic for the good old days. It's not just in housing. The Treasury and the Federal Reserve had to inject hundreds of billions of dollars to shore up banks battered by loans that went bad -- toxic debt, it was called. So we want banks to be more prudent, right? Wrong. Congress is complaining that banks that received federal aid are being overly stingy.
Well, yes. If a lot of your loans go bad, it's a sign that you need to exercise more care. That's especially true during a recession, which can wipe out companies that once were profitable. Any bankers who want to keep lending at the rate they did before are asking to become insolvent, and more insolvent banks would drag down the economy.
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