osewalrus (osewalrus) wrote,

A Few Quick Political Things

I am glad to see the House pass the Barney Frank housing relief bill. This is the best bill for the housing crisis I have seen, much better than the solution I cam up with back in August (and we all know how conceited I am about my own ideas). I do not have time for a detailed post (hopefully later). Briefly, the bill allows homeowners to refinance with FHA insured loans, but based on current value rather than purchase value. Lenders will receive 85% of the current value of the home but will be secured against any subsequent losses. Interest rates will be reset by FHA to fixed rates.

I also direct a nod to E.J. Dionne Jr.'s column in today's Washpo. The recent triumph of Democrat Don Cazayoux ina House special election in what had been solidly Republican Cajun country tells us a good deal about the temper of the Republican base and the probability of success of Rove-ian tactics in the fall. The power of such tactics is waning considerably, and Democrats would do well to consider this fact when weighing Clinton's argument against Obama.

The Frank Housing Relief Bill sticks it to the lenders who made the bad loans just enough to teach them a lesson, but protects them enough from the consequences of their folly to prevent an economic meltdown. Similarly, it helps homeowners out of a tight spot and prevents mass dislocation and home loss that have a shattering effect on the economy.

As for the "moral hazard" effect, consider that there are two sides to the market -- a willing borrower and a willing lender. If a willing borrower is foolish, he or she still needs a willing lender. So if the willing lender has been rendered "risk averse" by losing substantial sums of money, the hazard is avoided because no matter how the willing borrower has been "encouraged" by the expectation of a bail-out and escape from the consequence of folly there is no one who will lend the money. Indeed, making lenders bear the greater portion of the consequences is a far more effective means of preventing moral hazard then those solutions that stick it to borrowers and provide greater protection to lenders. Not only does it condition the larger repeat player capable of more damage than the individual borrower rescued, thus increasing the value of the "education," but it sends a clear message to the players best able to interpret it that in a choice on who bears the greater cost, it will be the lender.

Yes, this will make it harder for folks with marginal incomes to get loans. Wasn't that the point? The argument for deregulation -- that we should permit banks to make riskier loans because that helps poor people buy houses -- is exactly what got us in this mess, remember. Now all those poor people the Republicans championed deregulation for, the ones who could get a "step up" into the "ownership society" and enjoy the reward of ever increasing equity are now the subprime defaulters vilified as irresponsible idijits foolishly buying above their means.

Which, of course, brings me to the final moral argument in favor. Banks and other financial institutions that championed deregulation because they wanted to make these subprime should (in my opinion) bear the greater cost.

The chief arguments against the bill I have heard are: (a) it will help unworthy speculators and those who deserve to suffer the consequences of taking on debt they should have known they could never pay; and (b) "I have a loan on less favorable terms, but because I was a responsible person I am being punished. Why should my tax dollars go to bail out these guys when I could use a break myself?"

As for the first -- it is absolutely true that some speculators and other "unworthy" folks (however we would define unworthy) will get relief. Nevertheless, I hardly consider this a deal killer. As an initial matter, I happen to think the proportion of "worthy" beneficiaries to unworthy beneficiaries is high. But that is debatable along a variety of fronts. My real argument (which also addresses point (b)) is one of economic rationality. Whatever the merits of punishing the individual guilt and rescuing only the worthy individual, the results of this meltdown are catastrophic to me and other "responsible" people not in the same fix. I'll start with the hit on equity I (and everyone else who owns a house) is taking as a result of the meltdown. Now move on to the catastrophic economic consequences of lack of credit and higher interest rates rippling through out society which now relies a staggering 70% on consumer spending.

For my money, this "bailout" costing a few billion is cheap compared to what I and everyone else will need to pay down the road if we don't fix the problem. That's a cold, selfish, economic fact divorced from my feelings of who "deserves" relief. And the Frank bill, unlike the proposal that passed the Senate last month, provides the best way to go about spending the money where it will do the most good. Stop people from losing their homes, give lenders enough of a bloody nose to make them think next time before they make foolish loans, and minimize the expense to the government by making it a refinancing/insurance deal rather than a pay out to lenders.

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