The scuttlebutt is that FHA (Federal Housing Administration) is being retooled to assume lots of the bad paper issued by those nasty sub-prime lenders. Now that the proverbial fan is mired with economic reality, the options are bleak. Tap dancing from the Feds let us know that this problem is obviously too big to be rescued by an airdrop of cheap money. The choice is foreclosing on hundreds of thousands of new home owners and preparing for the economic and social tsunami or saving the day with something like a "Great Society II".
Such an unprecedented number of foreclosures will not only disrupt the financial order but perhaps the social order too. In as much as all those new loans invited many of the "have-nots" to become part of the "haves" through home ownership. That is, after all, the definition of a sub prime mortgage. Just like Katrina's anti-government backlash, so too will these forlorn foreclosures find the Government ultimately to blame. The last time we've seen this degree of (potential) wholesale displacements was the Great D and we were, by and large, much more appreciative of just how wonderful life was in these great states. That's not quite the case today.
Cynicism is pervasive and far too many Americans are both on the Government dole and quite convinced that the government is morally obligated to underwrite their folly as well as their happiness. So you have to at least entertain the idea of "what if".
LBJ sought mass compensation for the institutionalized imbalances through lots of well intended programs. A trillion was transferred from the "haves" to the "have-nots" and that redefined the concept of "opiates or the masses". It felt good but left the systemic problems untouched (if not exacerbated), Great Society I. Considering the magnitude of this debacle, maybe it's time for another dose of opiates. President Bush hasn't much of a legacy so why not tack on "no home owner left behind" plan? After all, if you're not quite up to a conforming loan, you've been preyed upon by those unscrupulous mortgage companies who virtually forced you get in over your head, you've suffered institutional oppression. You deserve a fix and this is America. A newly expanded FHA would consume a goodly portion of the bad loans to quell the public (and the markets), pay the defaults by fiat, and thus avert a catastrophe. It feels good, keeps the peace and forgets the binge ever happened, Great Society II.
Only, where do you think all that inflation came from in the 70's?