Crisis Redux

The Wall Street Journal is reporting that the U.S. Treasury is considering a plan to lower mortgage rates to 4.5% to new home buyers who qualify for a traditional mortgage (documenting income, etc.) to spur a rise in home prices.

While it is true that falling home prices are driving the financial crisis as it increases defaults on mortgages held by financial institutions, what this proposal entails is artificially propping up asset prices by lowering interest rates.

We need asset prices to fall to those levels that induce buyers to return to the market on their own accord. That is a necessary predicate for recovery to begin.

Actions which defer that reality simply increase the length of this recession and sow the seeds for future financial losses.