A Real (Subprime) Mess

With the growing problem of interest rate resets on subprime mortgages looming darkly on the horizon, the Bush Administration announced today a plan that would freeze rates for certain borrowers . The plan covers only those who live in their homes and fall within certain parameters (they must be current on their payments, actually live in the home [intended to exclude speculators] and must have taken out the mortgage between January 1, 2005 and July 31, 2007, among other exclusions).
So is this an exercise in compassionate conservatism? Probably not. Given the restrictions, the plan would apply to only about 12% of all subprime borrowers (about 240,000 homeowners).
But when Citigroup (with "large losses related to subprime mortgages and the credit market turmoil"), Merrill Lynch (the bruised but "once-proud Wall Street firm battered by losses from the mortgage debacle"), Countrywide Financial and Wall Street, generally, suffer substantial losses with the specter of greater losses yet to come, well, that clearly demands government involvement.
Of course, it strikes a lot of people as bizarre, even hypocritical, that a Republican administration would intrude into the market in this way and prescribe the dreaded bailout that's not a bailout. But the drying up of market liquidity (since no one knows who owes what, given the extraordinary complexity of the problem, everyone is wary of lending to the wrong party) is apparently significant enough to generate this response. Besides, better half a loaf than none in the face of the growing number of defaults.
That some homeowners will benefit from this is largely incidental (except for that 12%, of course). The particular purpose of this intrusion is to stem the bleeding from the financial sector's self-inflicted wound and, of course, desperately stave off the threat of recession in an upcoming election year.