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U.S. Budget Deficit
December 4, 2007

Will the government's ''mortgage fix'' harm its ability to lure foreign capital to fund the deficits?

Deficits Debt

"IDEAS OFTEN TAKE ON A MOMENTUM of their own, especially bad ones. In the rush to do something, anything, novel policies gain enthusiastic support and then carry the day. Only later do the unintended consequences of these hastily adopted schemes become apparent.

I'm old enough to recall the huzzahs that greeted President Nixon's radical shift in economic policies on Aug. 15, 1971, when his New Economic Program enacted a wage-and-price freeze, imposed an import surcharge and effectively severed the dollar's last tether to gold.

These measures, it was promised, would unravel the Gordian knot of rising inflation, faltering economic growth and an increasing international deficit. Instead, we got the worst of all worlds, stagflation and a plunge in the dollar that resulted in sharply higher oil prices. Sound familiar?

Today, the intractable economic problem we face is the collapse in housing activity caused by soaring mortgage delinquencies and foreclosures. Many of these are the result from resets in adjustable-rate mortgages, from 'teaser' rates to fully indexed rates. Families that could make their monthly nut at those initial, come-on rates can't do it once the rates are adjusted to market reality.

So what's the solution? If the higher rate is the problem, don't let it rise. Just as with inflation a generation ago, simply cap prices by fiat.

The solution being pushed by the Bush Administration, in cahoots with major mortgage servicers, seeks to emulate that example: freeze the rates on ARMs for some borrowers who can't pay the higher rates. Borrowers with steady incomes and clean payment history at the fantasy teaser rate should get a break and get to keep that rate. That would prevent delinquency and eventual foreclosure on these mortgages, which would benefit debtor and creditor alike.

That's the theory. But one person's liability is another's asset. Reducing the obligation to pay inevitably comes out of the income of the investor. Which, in turn, will reduce the willingness of the investor to invest and lend.

Given the mounting need to lure foreign capital, that can hardly be considered a good thing. The security of a loan covenant -- the contract between borrower and lender -- has attracted capital to U.S. markets from around the world."

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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