Intro: This post explores some recent news regarding the Financial Crisis and posits the idea that an important issue has been politicized to defend an ideological mission. That mission comes from the idea of subsidizing and increasing home ownership through Fannie and Freddie Mac. If the crisis destroys the economy it calls into question fundamentals of the idea of the government helping people reach the American dream. For the Democratic party this a central tenant of their belief that the government should be active in assisting individuals reach their goals. As opposed to a more traditional conservative, ‘hands-off’ approach to government.
Read on…
Well, if you have not been paying attention lately, then you might have missed out on what Congress did this week. They passed a four-hundred-and-something page bill to get the credit markets moving again. On Friday (10/3/2008), President Bush signed this ‘bailout’ bill into law:
But even as Mr. Bush declared that the measure would “help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Congressional Democrats said that it was only a first step and pledged to carry out a sweeping overhaul of the nation’s financial regulatory system.
The question that I have been asking myself is why this has become such a political issue. If you don’t believe me, then simply ask yourself how a three page proposal from the Treasury turns into four hundred pages. Of course, the original proposal was probably unsatisfactory for the amount of money it asked for, but the four hundred page proposal grew out of the one hundred page proposal rejected by the House.
To me it seems problematic to politicize and issue like the economy. The rhetoric of the Democratic and Republican campaigns regarding the economy is continually disappointing. Even when the campaigns implement economic analysis, it lacks a coherent philosophy that people can relate to. Take for example, Obama’s tax plan. Joe Biden’s attempts to explain it still leave someone wondering if their taxes will be changed and what the hell the Alternative Minimum Tax, the Corporate Tax Rate, Capital Gains Taxes, Tax Credits, and Tax refunds are? Wikipedia can answer some of these questions, but when push comes to shove its hard to say what changing any of these taxes will do to the economy. Simple economic analysis tells us that government taxes lead to deadweight loss. Economic analysis also tells us that businesses pass taxes on to consumers. As the Atlanta Journal Constitution puts in it:
One was on taxes. You don’t have to be smarter than a fifth-grader to know that Barack Obama’s campaign promises add up to a massive amount of new spending, probably in the range of $800 billion. Maybe more. Maybe far more.
Nor do you have to be very smart to understand the pretense behind the claim that “the rich and greedy corporations and Big Oil” will pick up the tab. The thing about the left is that they’re convinced you won’t mind getting soaked if “the rich” are getting wetter. It’s that class warfare that, election after election, is the primary weapon in the arsenal of the Democratic Party.
In the end, people don’t want to here a complicated system about 95% of Americans. They want to hear a simple yes or no answer. Something increasingly rare, just watch a presidential debate. You would need your fingers and toes to count how many times they avoid answering a question in a straightforward manner.
Let’s take another example, McCain’s health care plan:
In a Saturday morning radio address, Sen. John McCain said his administration would give every family a $5,000 tax credit to buy their own health insurance or keep their current plan. “And we will open up the national health care market to expand choices and improve quality,” he said.
Obama’s perspective:
A $5,000 tax credit sounds pretty good, Obama said. “What McCain doesn’t tell you is, the average cost of a family health care plan these days is more than twice that much: $12,680. So where would that leave you? Broke.”
So what the hell is going on with this plan? Currently, a lot of employers (but apparently not enough) offer health insurance. It seems to make sense to open the national market up. Increasing competition, in general, does good things for quality and price. Is a $5,000 tax credit the answer for getting people insurance though? I am not in favor of a nationalized health care system, but if we are going to make laws, I am in favor making good ones. So the bottom line is when the government is trying to help people get health care, will this help? Furthermore, as a ‘hot-button’ political issue, even if the tax credit would work, are people going to buy it?
Where am I going with all of this? Politicization of economic issues is completely acceptable to the American people, in fact preferred. For Democrats ‘the economy’ means how they are going to finance increasing spending and for Republicans ‘the economy’ means taxes. Politicization of the mortgage crisis currently hitting the U.S. economy has come as a result of one of the root causes.
In my opinion, government attempts to subsidize and encourage house ownership are one of the causes of the current crisis. Greed on Wall Street may have been a part of the problem, but I am certain there are some people on Wall Street who feel like one morning a few years ago the U.S. government seduced them into a few more home loans, dropped a roofie in their drink, and they are waking up today in a mess. A WSJ editorial that everyone should read shows Congressional testimony that has quotes from Congress people discouraging regulation in favor of increasing home ownership:
Senate Banking Committee, Oct. 16, 2003:
Sen. Charles Schumer (D., N.Y.): And my worry is that we’re using the recent safety and soundness concerns, particularly with Freddie, and with a poor regulator, as a straw man to curtail Fannie and Freddie’s mission. And I don’t think there is any doubt that there are some in the administration who don’t believe in Fannie and Freddie altogether, say let the private sector do it. That would be sort of an ideological position.
Regulators looked away form the corporatized version of their ideological battle and balanced it with regulations in other areas. These regulations and social norms have made it unacceptable for people to lose something they have a perceived right to. The effect of subsidizing and increasing home ownership is to create the atmosphere of entitlement. A great article in Forbes by Richard Epstein helps explain how regulation could actually contribute to the crisis, not deregulation:
One bad move has government legislators and courts intervening to slow down mortgage foreclosures because it is socially unacceptable for people to lose their homes. Unpleasant yes, but unacceptable no. Start with this assumption: Individual tenants can be evicted at the termination of their lease. Only the ardent defenders of rent control (which has ruined New York City real estate markets) find this outcome is unacceptable. Everyone else rolls with the punches.
So what is the difference between the evicted tenant and the foreclosed owner? Only this: The owner has put a down payment on the house. But so what? Foreclosed homeowners typically made only small down payments, or even none at all. Treat their mortgage payments as lease payments, and bump up their amount a bit by dividing the down payment over the number of months before foreclosure. Not much of a financial difference between the tenant and the owner.
Yet once regulators slow down foreclosures, other potential homeowners are denied opportunities to purchase housing they can afford. The housing stock cannot recirculate. Banks that acquired this mortgage paper see their portfolios nosedive. That dicey paper, as William Isaac noted in last week’s Wall Street Journal, drives the entire economy over the edge by strict government regulations that require all financial institutions to “mark-to-market” the various instruments in their portfolio.
New tenants in the politicized bailout may create problems actually bailing out the economy. So by pandering to Main Street, lawmakers may have screwed everyone over. As much as people hate the idea of bailing out Wall Street, if it helps the economy, doesn’t it help eveyrone? The tenant that causes problems is adjusting mortgages.
Equally unwise would be any effort to tie an eventual bailout to additional homeowner relief from foreclosure market, here in the form of requiring “reasonable” adjustments in mortgage terms. Any financial bailout, wise or foolish, will work less well if the housing stock remains tied up in ways that make securitized mortgages even more difficult to value.
The point of this post is to say that Democrats have something at stake in turning the Financial Crisis into a political issue, otherwise it is a crisis of the effects of financing the American dream.
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