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Monday, August 5, 2013

Will The Fed Declare War...on Homeowners?

The concept of municipalities using their powers of seizure of private property through eminent domain to provide relief to selected "victim" homeowners by seizing and reselling the mortgages on the homes of those underwater borrowers has slowly gained traction.  I have previously criticized the plan in both my July 2012 article and my more recent critique of U.S. Senate candidate Cory Booker's proposal last month.  

Now, other economic commentators are chiming in against the concept.

Jonathan Weil of Bloomberg warns that eminent domain powers may encourage local government graft and new waves of corruption in communities where governments are already somewhat corrupt, systemically or otherwise. 

Jeffrey Dorfman of RealClearMarkets.com writes that eminent domain will help a select small group today, but the costs of the program will be borne by all borrowers, everywhere, in the indefinite future. 

This recent Federal Reserve Bank of New York white paper simply ignores the effects of eminent domain on the lending practices of banks. The fact that the New York Fed actually chose to publish this, in and of itself, should be alarming.  It is one thing for the Fed to declare war on savers by imposing de facto negative interest rates on savings accounts.  It is quite another to suggest the Fed will declare war on homeowners.  


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