Thursday, August 16, 2007

Not Bailing on Principle

It is interesting that the term "subprime," with minimal definition, has become the term of art for the kinds of loans that are now troubling lenders. One hopes that people understand that these were loans that were risky -- for both borrowers and lenders -- because the former group had credit problems.

Be that as it may, George Will says that in the current year that it is fortunate that monetary policy will be set by the Federal Reserve, not by pandering politicians:

In 2008, as voters assess their well-being, several million households with adjustable-rate home mortgages will have their housing costs increase. Defaults, too, will increase. That will be a perverse incentive for the political class to be compassionate toward themselves in the name of compassion toward borrowers, with money to bail out borrowers. If elected politicians controlled the Federal Reserve, they would lower interest rates. Fortunately, we have insulated the Federal Reserve from democracy.

The Federal Reserve's proper mission is not to produce a particular rate of economic growth or unemployment, or to cure injuries -- least of all, self-inflicted ones -- to certain sectors of the economy. It is to preserve the currency as a store of value -- to contain inflation. The fact that inflation remains a worry is testimony to the fundamental soundness of the economy, in spite of turbulence in a small slice of one sector.

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