Uncle Sam is now a shareholder at many of the nation’s top banks. He recently gained the authority to tell the nation’s largest manufacturers how to run their businesses. And now he is about to gain the ability to dictate your home’s value and how much you pay for it each month.

As you probably know, Congress is working on legislation that allows bankruptcy judges to rule on payment terms for distressed mortgages. If passed, judges will have the ability to reduce the amount of principal due on an existing mortgage. It is a scary and dangerous power.

Under current Chapter 13 bankruptcy laws (which force troubled borrowers to continue paying off their debts), judges have the power to modify credit card debt and car loans, but cannot touch first mortgages. Home lenders could stay out of court. But that may be changing.

Citigroup (NYSE:C) originally opposed the new legislation, saying it gives unfair power to courts. But after receiving more than $45 billion from Washington over the past few months, it has had a not-so-surprising turnaround. It is now officially in favor of the legislation that could force it to lose money on court-altered loans. Many of its competitors remain in opposition.

Don’t worry, we will save you

This is just the latest attempt from Washington to secure votes and ensure Americans remain addicted to its socialized teats. We “saved” the banks. We “saved” Detroit. Now we have to “save” the homeowners. How many votes are left to buy?

Borrowers made risky bets. Betting that home prices would continue to soar, they got themselves into loans they knew they could not afford. Now that their arrogance is working against them, they are expecting the government to come to their rescue.

A signed contract used to have a sacred obligation between two entities. Now it is viewed as little more than guidelines when it comes time to re-negotiate.

We all know the government’s short-term goals with this proposed legislation. Congress wants to get the economy back on track and look like a saving grace.

But what are yet to be seen are the long-term ramifications of our government’s constant meddling in the world of free markets. The Federal Reserve has hurriedly lowered interest rates in a last-ditch effort to spur the economy. It wants mortgage rates to reach as low as 4.5%.

If Congress expects lenders to expose themselves to the mercy of the bankruptcy courts, it cannot possibly demand them to do it without charging a premium. According to some mortgage-industry insiders, that premium will likely come in the form of interest rates at least 1% or even 1.5% higher.

By allowing the courts to write their own mortgage contracts, our elected officials are putting many more Americans at risk. Not only will the action slow the housing market even further (lenders won’t lend and buyers will not be able to afford to borrow), but it will drastically increase one of the nation’s most important industries exposure to political risk.

If the goal of the new administration truly is to redistribute the nation’s wealth, it is doing a fantastic job. It is destroying the American prosperity one bill at a time.

Source: Need a mortgage? Call a judge

It is May Day in Europe. It is a holiday for almost everyone. But here at the Daily Reckoning’s mobile headquarters, we keep reckoning day in and day out.

And what we reckon today is that two extraordinary things happened yesterday – related to one another and equally absurd.

Yesterday, the Fed did what it was widely expected to do – it lowered rates by 25 bps, bringing the key Fed lending rate down to 2%, or about half the rate of consumer price inflation. And that is where we begin to wonder. What kind of a bank would lend money for less than the inflation rate? Isn’t it sure to lose money?

Yes, of course…but it’s a long, long story…

The other extraordinary thing that happened was that the US federal government began sending people “tax rebates.” Of course, they are not tax rebates at all. Everyone who filed a tax return will get $300, whether he owed any taxes or not. A taxpayer will get another $300. Plus, children and dependents will get $300 each.

Alas, today’s news tells us that much of the presumed benefit from the giveaway program will be lost because of higher fuel and food prices.

Continues below …

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Lending money below the inflation rate…giving out money you don’t have, when you are already so deep in debt you will never get out – how could any of this be good for the real economy? But by this time we are so far into Never, Never Land that we will never find our way back.

A consumer economy may benefit from consumer spending – but only if consumers have money to spend. If giving away phoney money, which you don’t really have, could make things better – why stop at $300 a head? Why not give away $1,000 a person…or $5,000?

Likewise, if it’s a good idea to lend money at 2% below the inflation rate…why not lend it at 10% below the inflation rate?

The really extraordinary thing is that the brightest minds in the nation think they can control the economy in these extraordinary ways. But they would think so, wouldn’t they? The guy who believes drinking doesn’t affect his driving is always the guy with the whiskey bottle.

Meanwhile, there was some ordinary news yesterday too. The Dow eased off 11 points. The euro stayed at $1.55. And gold lost another $11 – dropping to $866. Wouldn’t it be nice if the price would fall below $800! Maybe it will; maybe it won’t. But Dear Readers are urged not to lose heart. This bull market in gold isn’t over yet. The real excitement is still ahead.

*** Jeremy Grantham, writing in the Financial Times, says the Fed needs a smarter, tougher man at the helm – someone like Paul Volcker.

He explains why:

“Efficient Market Hypothesis assumes man acts rationally and efficiently in economic matters in ways that can be caught in elegant mathematical models. Ben Bernanke, chairman of the Federal Reserve, shares this view completely, and Alan Greenspan, his predecessor, when it suits him. In such a convenient world, there can be no bubbles and no crashes. A related belief is that sensible, disciplined control of money supply will drive away all ills, including the madness of crowds, and, therefore, a sensible central banker is all powerful.

“Unfortunately, both concepts are complete illusions. First, we live in a behavioural jungle where markets can crash 23 per cent in a day without any defining event, price/earnings ratios in Japan can rise to 65 times and the value of land under the Emperor’s palace really can equal California’s. Second, central bankers do not always do the right thing, often because that would involve great career risk. Being slapped by a Senate subcommittee for saying “irrational exuberance” is bad enough. Taking away punch bowls and risking being seen as holding the pin when the bubble pops is even more dangerous stuff.

“The world seems to think the Fed has substantial power to influence the real economy. Its tools, though, are not nearly as effective as believed. It controls short rates that influence banking profits and perhaps a little increase or decrease in debt. But long-term growth depends on education, supply of workers, capital spending, and technology, over none of which the Fed has any control.

“Both Mr Bernanke and Mr Greenspan have trouble seeing bubbles. When Mr Bernanke describes an 80-year US housing bubble as “merely reflecting a strong US economy”, we might wonder about his statisticians or his competence. But, really, it is about belief. He is not looking for bubbles to exist in his theoretical world.

“Not believing in bubbles and/or being unwilling to risk unpopularity by moving against them leaves the two Fed bosses with no alternative but to give free rein to speculators on the upside and focus on the downside. But, even on the downside, did they have to be so generous?

“It created an extreme form of moral hazard: it allowed risk takers to win too big and too easily; it helped spawn a huge hedge fund industry; and, worse still, it helped turn formerly discreet bankers into speculators. If you even partially bail out Bear Stearns – leveraged at 40 to 1 – next time someone will try 50 to 1.

Now, we don’t hold any ethanol stocks in the Asia Business & Investing portfolios… but I think this is an urgent situation that requires immediate action on your part.

Also, avoid at all costs any slick come-ons you might receive that beg you to invest in the ethanol miracle.

Ethanol is toast… actually corn flakes.

Of all the great scams the US federal government has perpetrated on its people, when all is said and done, the corn-based alternative fuel will go down near the top as one of the all-time greatest.

Born in bad science, perverted by shady for-profit interests, ethanol is nothing more than a massive billions-of-dollars gift from Uncle Sam to big agriculture.

It takes more energy to create a gallon of ethanol than that same gallon produces.

Mark my words, fast-expanding global food crisis means ethanol’s days as a darling of petro-apologists are just about over.

My bet is that you’ll soon see big agriculture tout some sort of mysterious breakthrough that it will claim allows it to make ethanol more efficiently. That will be a desperate lie.

It will be a dog that won’t hunt, because the mainstream media have begun to figure out the ethanol con job. It’s discovered the sound science that proves that stripping the land in order to grow more corn for biofuels actually adds more carbon to the environment – a lot more.

Look, the agriculture lobby may be the US’s most powerful, but next time you pay $4.49 for a 24 oz. box of Kellogg’s Corn Flakes and $3.75 for a gallon of gas, ask yourself whose well-being is it lobbying for?

Sometime during the next five years, no matter what then President Al Gore (doesn’t it just have to be) or President John McCain will claim, ethanol’s slimy reality in the US will lead to its collapse.