Foreclosure – preventing causes better than dealing with consequences

Comments on Robert Gottliebsen “Can't hold back the rising tide”, 1/07/2009, http://www.businessspectator.com.au/bs.nsf/Article/WallStreet-pd20090701-THS6A?OpenDocument&src=sph

The practice of mortgage and foreclosure in the US is different from that in Australia. Foreclosure has been more widespread in the US than here. It is hard to say which is more beneficial or harmful to the lenders involved.

The culture of foreclosure by individual lenders is no different from herd behaviour in a bear market. If you don’t do it and get out quickly enough, you may get stampeded and crushed and incur greater losses. It is like the prisoners’ dilemma.

If all lenders can come to an agreement and hold their fires, then the collective outcome may be better. But that needs everyone to do the same and few to breach the code.

Government’s intervention may help if the problems are not too severe and persistent. If the problems are very severe and persistent, then what the government does is to momentarily prevent the collapse of a dam that will eventually collapse. When the time of collapse comes at a later stage, the collapse may be more severe and the damage greater.

The US has already got the crisis and the crisis will still run its courses. No matter it is the lenders or the US government, they cannot got rid of all the pains, like foreclosure, without them being felt by many Americans. It is a painful process and this article just indicates that.

A better way for the government to do is to deal with the causes of foreclosure in the first place, to prevent the development of bubbles and to prevent lenders from doing malpractice in lending. While it is too late for the current crisis, it will be valuable for the future.