To Unfreeze Credit, Stop Coddling the Debtors

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John Tamny, RealClearMarkets

Last fall, in an Oct. 16 interview with CNBC’s Larry Kudlow, outgoing U.S. Treasury Secretary Henry Paulson addressed the imposition of the Troubled Asset Relief Program on banks, and specifically responded to Kudlow’s query about the level of control the federal government would exercise over the recipient firms. Paulson dismissed the very idea of heavy government oversight, arguing instead that "these are passive investments."

Even at the time, it was clear that Paulson was protesting too much. Going back to last spring when Paulson asked mortgage lenders to voluntarily reduce payments for troubled debtors, the very notion of "voluntary" reductions was laughable. Given the massive subsidization of the lending and housing sectors by the federal government (think mortgage interest deductions, Fannie Mae and Freddie Mac, plus zero capital gains treatment on home sales), any "suggestion" about how lenders should conduct their business affairs from our federal minders is surely an order.

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