The Politics (and the Economics) of Mortgage Relief
By blackhedd Posted in Economy | mortgage relief — Comments (50) / Email this page » / Leave a comment »
I continue to be absolutely amazed at the amount of unadulterated mendacity being peddled by serious experts on finance and economics in news interviews.
The global financial system continues to be rocked by a now eight-month-long credit crisis. The effects of the crisis on the real economy are now beginning to be felt. (The impact of the news reporting on consumer confidence has long been in evidence.) And millions of people now owe more on their home mortgages than their houses are actually worth.
The situation is a lot like the aftermath of Hurricane Katrina. Clamor for Federal action has reached fever pitch. Meanwhile the Administration insists that it's already doing all the right things, while at the same time uncomfortably pledging to do more. And the political opposition is making hay.
It's true that the current global financial crisis was triggered by distress in the subprime sector of the US mortgage market. But it's also true that the conditions that set up the crisis are extremely complex and poorly understood. Fortunately, this very complexity will militate against hasty and ill-considered policy responses to the problem.
Things are different with respect to the mortgage situation at the level of individual homeowners. It doesn't take much for an individual whose property has fallen in value to feel like she got screwed, by someone. And if that unidentifiable someone won't make her whole, then the government should.
This adds up to some nearly-insurmountable political pressure for a national mortgage bailout, not least because it can be oversimplified into a compelling sound-bite: "Through no fault of their own, millions of homeowners are being pushed to the brink of foreclosure, and if we don't help them, their distress will destroy the economy!"
We've rehearsed the arguments against a bailout here many times. The first one is moral hazard. Many people took advantage of an extreme lapse in underwriting standards during 2005 and early 2006 to buy more house than they could afford. At the same time, rocket-science risk-management technology fooled many lending institutions into thinking that they could offer credit to people that were quite likely to default, simply by charging a high-enough rate of interest.
There are a lot of dirty hands here, and bailing them out will ensure that they'll try to do the same thing again the next chance they get.
The second counterargument is economic. The collapse in home values simply means that a large amount of asset value has disappeared. (It's disappeared both from the real-estate component of the capital stock of the US, and it's also disappeared from the value of financial assets held by lenders.) If we go to the banks and the homeowners that lost money, and write them a check to cover their losses, the result can only be one of the following: either we'll take money away from people who did nothing to lose it, or we'll create an enormous pulse of inflation.
The best approach is to let the situation work itself out on its own. The Bush Administration already has in place a policy for encouraging and facilitating private workout arrangements, in which distressed homeowners and lenders get together case-by-case to negotiate lower rates, short sales, or other contract modifications. I'm told that more than a million such facilitated workouts have already been done.
The great virtue of individual workouts is that they avoid the need to decide on a general approach to the problem that can be encoded in legislation. Every situation is different. There really are people out there who bought too much house, or were actively trying to speculate on rising home values. These people should get a bad outcome, not a bailout.
There are other people who really do not qualify to be homeowners. They should be foreclosed quickly and without too much pain, so they can get back into rentals and start rebuilding their finances. In many cases, these people have relatively little equity to lose anyway, so their downside is quite limited.
And then there are people with a lot of home equity built up over years, who cashed it out at unaffordable rates. These are tricky cases. On the one hand, bailing them out means that you and I will be paying for a lot of Florida vacations and home improvements that happened two and three years ago. I'm not up for that. In other cases, there were medical expenses or the costs of starting up new businesses. That's touchier.
So every one of the millions of cases is different. And the lenders have every incentive to compromise, because foreclosure is a total killer for them. As I said, it's best to let this happen organically, over time. And the housing market will find its level at some point and start trading again.
But if we go out and do a bailout, then we'll end up with a one-size-fits-all national formula. And it will be arrived at by political means. You'll be told that it's cruel, heartless and racist to throw millions of women and minorities, all with starving (and telegenic) children, out onto the street. And you'll also be told that your own livelihood is at risk, as all of those millions of new homeless stop buying the goods and services that your employer provides. Reality has nothing to do with a decision-making process like this.
To be sure, Democratic politicians and commentators are encouraging exactly this kind of an outcome. Their attitude is that time's-a-wasting while we conservatives hesitate over the wisdom and the morality of modifying millions of private contracts. They think it's absolutely the right thing to do to forcibly change private arrangements that were freely entered into and broke no laws. In older and quainter times, such behavior was known as tyranny, and we once fought a Revolution to free ourselves from it.
The Administration is now facing an extremely delicate political balance.
The last thing they want to face is the all-too-credible charge that they are acting like the Hoover Administration, drifting and dissembling while the economy crashes and burns. For their part, the Democrats have a golden opportunity to press this line and ride it to greater political power and a much-expanded Federal role in the management of the economy.
The Administration will try to steer a middle course. They will promise to keep working on the problem of mortgage relief, and to search for a bipartisan solution with Congressional Democrats. The Democrats will have the political wisdom to let the Republicans continue to own the whole problem, while proposing draconian (and highly popular) relief legislation. Senator McCain, for his part, should stand up and exercise leadership by saying that individual taxpayers should not have to pay for the errors of others.
Politically, it's all going to come down to the following question, ladies and gentlemen:
Do you believe that individuals facing foreclosure are, for the most part, in a situation of their own making? Or were they preyed upon by rapacious bankers and Wall Streeters?
How you frame the question determines the approach you'll take to the solution. And that applies to the electorate as a whole.
So much for the politics of the situation. The economics are quite complex, and deserve a long post on their own.
-Francis Cianfrocca ("blackhedd")