The Joy of Saving

The Federal Reserve has bailed out Bear Stearns. The Treasury Department has proposed the re-organization of the financial regulatory structure. The capital markets are receiving a lot of government attention. But what about American households? Many of them have tattered balance sheets. That's why so many people took out no/low downpayment, adjustable rate, interest only, option ARM, maybe we can repay them (but maybe not) mortgages. If their household balance sheets had been stronger, they could have gotten plain vanilla 30-year fixed rate mortgages. There'd be many fewer defaults and foreclosures, and Wall Street might not have needed a bailout. But is anyone in the federal government trying to strengthen household balance sheets? Is it sensible to tax interest on savings at ordinary income levels? Is it sensible to give borrowers a deduction for mortgage interest costs no matter how stupid the mortgage? Savings create a comparatively stable deposit base for banks, and banks desperately need stability now. Stupid mortgages created mammoth risks for banks that seem to persistently emerge in whack-a-mole fashion every fiscal quarter. The Fed can't keep sticking its thumb in the holes in the dikes because new holes are always bursting out like horror movie corpses popping up from graves. Some attention to the underlying problems is usually a better way to deal with a crisis than mad scrambles that create moral hazard. For more on this point, go to http://blogger.uncleleosden.com/2007/11/passbook-savings-cure-for-banking-and.html.