Tag Archives: election

John McCain, New Deal Democrat?

Meet John McCain, New Deal Democrat.

In the presidential debate this week, McCain shocked many of fellow Republicans by proposing the largest and most expensive government intervention in the housing market in U.S. history.

Specifically, McCain announced that he would tell his treasury secretary to spend $300 billion to buy the mortgages of homeowners in financial trouble and replace them with more affordable loans.  The program, which McCain calls the American Homeownership Resurgence Plan -– there’s that word “surge” again — would be available to mortgagors for whom the property is their primary residence, who can prove they were creditworthy when the original loan was made, and who made a down payment.

According to the McCain campaign:

“John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis.”

“America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.”

“The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.”

“The McCain resurgence plan would be available to mortgage holders that:

  • Live in the home (primary residence only)
  • Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).”

“The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of ‘negative equity’ in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.”

“The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.”

This certainly doesn’t sound like a Republican plan to me.

In fact, it isn’t. 

As the New York Times has pointed out, “The mortgage renewal idea actually originated with Senator Hillary Rodham Clinton, said Charlie Black, a senior adviser to Mr. McCain. And Mrs. Clinton, who proposed the idea in a recent newspaper column, borrowed it from a Depression-era New Deal agency, the Home Owner’s Loan Corporation.”

How seriously should we take McCain’s plan?

First, we should appreciate what a stunning turn-around this proposal is for John McCain, who has previously railed against the “moral hazard” of bailing out homeowners who took out larger mortgages than they could afford.

Only last March, McCain declared — in response to the Hillary Clinton plan that McCain has now closely appropriated — that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” 

As the New York Times then observed, “Mr. McCain’s remarks on Tuesday represented a stark tonal shift from the increasing calls for helping homeowners, as he faulted not only borrowers who engaged in risky lending, but suggested that some homeowners engaged in dangerous financial practices. ‘Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates,’ he said. Mr. McCain argued that even during the ongoing crisis, the vast majority of mortgage holders continued to make their payments. ‘Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million homeowners are doing what is necessary — working a second job, skipping a vacation and managing their budgets to make their payments on time,’ he said. ‘That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?’”

Second, we should note that McCain’s point man for the plan is his senior economic advisor Douglas Holtz-Eakin.  Holtz-Eakin was the Chief Economist for the President’s Council of Economic Advisors under President George W. Bush and Senior Staff Economist for President George H. W. Bush’s Council of Economic Advisors.  He was, therefore, as responsible for the deregulation that lead to the mortgage mess as any single economist could be.  (He was also the person who claimed that McCain was responsible for the invention of the Blackberry phone.)   If we are to take McCain’s proposal seriously, then we must assume that Holt-Eakin has also had a Saint Paul-like sudden conversion and is now not a Bushite but a New Deal Democrat.

Third, we should look at the conservative reaction to McCain’s plan.  If they thought that McCain was serious about his plan, they’d be exploding with condemnation and accusations of betrayal.  But, so far, the National Review has nothing to say about it.  Conservative blogs mostly call it “pandering”  — and while they’re not happy about it, they understand it as an election ploy.  The Wall Street Journal doesn’t seem very upset either, taking an uncharacteristically wait-and-see attitude toward a proposal that would violate the foundational principles of modern Republican economics: “The idea must have puzzled many viewers and we’ll reserve judgment until we see the fine print,” the Journal said.” At a glance, it doesn’t sound like something Democrats would oppose — and elections are decided on differences.”

Our conclusion?

The McCain proposal isn’t serious, and few conservatives believe that either (1) McCain will win (and therefore be in a position to implement the plan) or (2) that McCain would implement the plan if elected.

We think that McCain’s new homeowner bailout program should really be called the “McCain Campaign Resurgence Plan.” 

Falling precipitously behind in the polls, especially in so-called “swing states” like Ohio, Florida and Michigan that have been hit hard by foreclosures and falling home prices, McCain has suddenly — and unconvincingly – decided that his favorite president is not Ronald Reagan but Franklin Roosevelt.

We’re not buying it.

Nevertheless, it is a watershed moment in American political history when the Republican candidate for President — and self-described foot soldier in the Reagan Revolution — attempts to outdo the Democratic candidate as a New Deal Liberal.

UPDATE:

Now that a few days have passed and the McCain campaign has repeated its call for a $300 billion bailout of mortgage holders at taxpayer’s expense, conservatives have taken the proposal seriously enough to lambast it.

CNN.com offers a good roundup of conservative commentary: 

” In a sharply worded editorial on its Web site Thursday, the editors of The National Review — an influential bastion of conservative thought — derided the plan as “creating a level of moral hazard that is unacceptable” and called it a “gift to lenders who abandoned any sense of prudence during the boom years.”

“Prominent conservative blogger Michelle Malkin went one step further, calling the plan “rotten” and declaring on her blog, ‘We’re Screwed ’08’.”

“Matt Lewis, a contributing writer for the conservative Web site Townhall.com, told CNN the plan only further riles conservatives upset with McCain’s backing of the massive government bailout plan passed last week.”

“‘Fundamentally, the problem is John McCain accepts a lot of liberal notions, unfortunately. There is somewhat of a populist streak,’ he said. ‘Most conservatives really did not like the bailout to begin with, and this was really kind of picking at the scab’.”

 

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Who is Still Against Federal Foreclosure Legislation?

As the Congress comes closer to passing legislation to help homeowners facing foreclosure, it is worth taking a look at the opposition to federal foreclosure aid.

Of course, there are those who strictly oppose nearly all forms of government intervention in the economy.  Congressman and presidential candidate Ron Paul and his free market libertarian supporters would be among this group.

Then are those who are opposed to market interventions in general, but will support some government interventions when the stability of the market is at stake.  Most Republicans fit into this group — including Federal Reserve Chairman Ben S. Bernanke.

That’s why it was significant that it was Bernanke who last week made the most convincing argument from a free market perspective for federal aid to homeowners facing foreclosure.

As we noted in an earlier post, Bernanke told an audience at the Columbia Business School that the foreclosure crisis posed the clear and present danger of wreaking economic havoc far beyond the housing market. “High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

What is at stake, according to Bernanke, is not merely the homes and financial well-being of hundreds of thousands of borrowers, but “the stability of the financial system.”  In this extreme circumstance, even staunch free market advocates, such as Bernanke himself, recognize the need for the government to intervene in the market.

We think, then, that the overwhelming vote in the House of Representives in favor of government intervention to stop the rising tide of foreclosures — legislation that now has the support of many free market Republicans — was rooted at least as much in the economic reality of averting catastrophe as the political expediency of government largess in an election year.

Who then is still opposed to foreclosure aid?

The answer is the apartment owners.

Behind any legislative process is a power struggle of conflicting interests, and very often these interests are economic.  In the case of foreclosure aid, there this now a growing consensus that the foreclosure crisis threatens not merely the borrowers and the lenders, but the economy as a whole and hence the economic interests of almost every sector of the economy.

Except apartment owners.

The National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) have consistently argued that the blame for the foreclosure crisis is what they have called the “misguided” national policy of “home ownership at any cost” and that “People were enticed into houses they could not afford and the rarely spoken truth that there is such a thing as too much homeownership was forgotten.”

The fact is that in sharp contrast to other sectors of the real estate market, the apartment industry has not suffered as a result of the current housing crisis.  Rather, as we’ve noted before, the real estate crisis is forcing the lower end of the single-family housing market back into multi-family rental apartments.  People have to live somewhere — if they can’t afford to live in a house that they own, they will be forced to live in a house that someone else owns, such as multi-family apartment units. As homeowners suffer, apartment owners benefit.

The apartment industry has some very powerful supporters in Congress, including Senator Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking Committee.   Senator Shelby,  who has opposed federal intervention to stop foreclosures, has made millions as a landlord and is the owner of a 124-unit apartment complex in Tuscaloosa called the Yorktown Commons. 

“I want the market to work if it can, and most of the time it will, but not without some pain,”  Senator Shelby has said.

This time, the pain appears to be too great, too wide-spread, and too dangerous, for most other members of Congress, as well as most important players in the economy, to allow it to continue unabated.

Indeed, Shelby has already signaled that he would support a version of the legislation — and that the White House would sign the bill into law.

“I think if we reach a compromise,” Shelby said, “it would be acceptable to the White House because, as a Republican and former chairman of the committee, I’m going to do everything I can, work with the administration, to make sure that the program works for those it’s intended to do and make sure we can afford it as a nation.”

In this crisis, even Senator Shelby has other, larger, and more important economic interests at stake than helping the apartment industry.

 

 

Fed Chair Bernanke Warns Foreclosures Could Sink US Economy — Is He Threatening Lenders?

In a speech today at the Columbia Business School, Federal Reserve Chairman Ben S. Bernanke issued his strongest warning to date about the danger of the rising tide of home foreclosures sinking the US economy.

“High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

Bernanke began by detailing some of the nasty numbers of the foreclosure crisis:

  • About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure.
  • Foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006.
  • The rate of foreclosure starts is likely to be even higher in 2008.
  • Delinquency rates have increased in the prime and near-prime segments of the mortgage market.

He then warned that the catastrophic effects of these millions of foreclosure proceedings will extend far beyond the parties to the mortgage:

“It is important to recognize,” Bernanke said, “that the costs of foreclosure may extend well beyond those borne directly by the borrower and the lender.  Clusters of foreclosures can destabilize communities, reduce the property values of nearby homes, and lower municipal tax revenues.  At both the local and national levels, foreclosures add to the stock of homes for sale, increasing downward pressure on home prices in general.” 

“In the current environment, more-rapid declines in house prices may have an adverse impact on the broader economy and, through their effects on the valuation of mortgage-related assets, on the stability of the financial system.”

The real threat that the foreclosure crisis posed to the overall economy, Bernanke said, was “the declines in home values, which reduce homeowners’ equity and may consequently affect their ability or incentive to make the financial sacrifices necessary to stay in their homes.”

The responses to the foreclosure crisis specifically endorsed by Bernanke were nothing new —  working with community groups trying to acquire and restore vacant properties; encouraging lenders and mortgage servicers to work with at-risk borrowers; developing new lending standards to prevent abusive lending practices; working with the Bush administration’s Hope Now Alliance; expanding the use of the Federal Housing Administration (FHA) and government-sponsored enterprises such as Fannie Mae and Freddie Mac to address problems in mortgage markets.

But we think that the tone and perspective of his speech signaled that he was far more ready than the current administration to endorse a wide-ranging federal program to aid homeowners who are in default.

Bernanke came close to saying as much:  “Realistic public and private-sector policies must take into account the fact that traditional foreclosure avoidance strategies may not always work well in the current environment.”

We think by “traditional foreclosure avoidance strategies” Bernanke meant voluntary procedures undertaken by the financial market itself; the “non-traditional foreclosure avoidance strategies” that Bernanke suggested might be necessary would then be mandatory procedures imposed on the market.

We therefore think that Bernanke’s speech contained a threat to the very financial institutions that the Fed has been so generous toward for the past six months.

So far, lenders have been asked to voluntarily help stem the foreclosure crisis by working with homeowners.  Now it appears that Bernanke may be close to supporting mandatory restraints on foreclosures.

We think Bernanke may have been saying this to the lenders and the leaders of the financial market: “We’ve made billions of cheap dollars available to you, so that you could stay afloat and so that you could make this money available for new borrowing and refinancing to prevent foreclosures.  You have not kept your end of the bargain.  If you don’t move much further along this path soon,  it is in the interest of the US economy overall to force you to do so.”

The lenders and financial institutions haven’t listened to threats from Congressional Democrats like Barney Frank or taken the voluntary actions requested by the Bush administration.

Maybe they’ll listen to today’s warning by Ben Bernanke.

We think they’d better.

 

 

The Fed Nears the End of the Rate-Cutting Line — Now its the Banks’ Move

After the Federal Reserve cut short-term interest rates on Wednesday for the seventh time since September 2007 — lowering the federal funds rate to 2 percent, from 2.25 percent, the lowest level since November 2004 — most analysts observed that the Fed’s move showed that it was more concerned with preventing recession than halting inflation.

We’re not so sure that it is a question of recession verses inflation that’s driving the Fed.

We think that the Fed’s real concern right now is neither inflation nor recession, at least not directly, but the lack of liquidity in the financial markets and the lack of funds that financial institutions are making available to borrowers.

So far, the Fed has pumped more than $400 billion into major U.S. financial institutions in the hope that these institutions would make this money available to borrowers. 

And, so far, they haven’t done so, and liquidity conditions in the credit markets have continued to deteriorate. 

Despite the Fed’s inceasing generosity for the past six months, it has been harder, not easier, for businesses (and individuals) to borrow money.

The Fed is nearing the end of its rate-cutting line.  If the financial spigot does not loosen for borrowers based on the latest cuts, there may be no more that the Fed can do, especially since, with rising fuel and food prices, fears of inflation are already starting to overtake fears of recession, in America’s living rooms as well as its Board rooms.

Two members of the Fed’s Open Market Commitee  — Richard W. Fisher, president of the Dallas Fed, and Charles I. Plosser, president of the Philadelphia Fed — which is charged under federal law with overseeing national monetary policy — voted against lowering the rates this time.  And the criticism of the Fed’s policy of lowering interest rates and providing cheap money for the banks is getting broader, louder and more influential.

The banks and major lending institutions have been waiting for the Fed to cut interest rates as far as it possibly would before they start lending.

That moment has probably arrived.

Now it’s the financial market’s turn to make a move.

 

 

New Regulation of Credit Industry is Now Inevitable. The Only Question is How Much Regulation, and with How Much Bite?

There can no longer be any question whether there will be new regulation of the credit industry in the wake of the housing meltdown and the mortgage crisis.

The only question now is the extent of the regulation and how much teeth it will have.

Treasury Secretary Henry Paulson eliminated any doubt regarding new regulation when he conceded that the Federal Reserve should bolster its supervision of investment banks while they are taking cheap money from the Fed’s new emergency program.

Paulson said that the Bush administration will soon put forth a blueprint for federal oversight in an effort to promote smoother functioning of financial markets.

”This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said.  ”These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.” 

Greater oversight is necessary, according to Paulson, to “enable the Federal Reserve to protect its balance sheet, and ultimately protect U.S. taxpayers.”

Wall Street’s major investment banking firms, including Goldman Sachs, Lehman Brothers and Morgan Stanley, averaged $32.9 billion in daily borrowing over the past week from the new Fed program, compared with $13.4 billion the previous week. On Wednesday alone, their borrowing from the Fed reached $37 billion.

To add to the growing conservative consensus that greater federal regulation of the credit market is necessary, Wall Street Journal columnist Jon Hilsenrath wrote on the front page of the newspaper’s Money and Investing section that “if the government is going to intervene aggressively when bubbles burst, as it’s doing now, then maybe policy makers should do some new thinking about how to prevent bubbles in the first place.”

Democrats, both in Congress and on the presidential campaign trail, have called for more extensive and permanent regulation of both the credit market and the mortgage industry than that proposed by the Bush administration.

The final outcome will depend on who wins in November and what happens in the economy between now and the next Inauguration Day. 

But it is now clear that one consequence of the Bear Stearns bailout and the Fed’s cheap money policy for the major investment banks is to have made some form of new regulation of the credit market and the mortgage industry inevitable.

In the meantime, we’re still waiting for the enormous sums of cheap money that the Fed has pumped into the credit industry to make its way down the pipeline to the rest of us in the economy. 

The Battle Lines Have Formed in the Politics of the Credit and Mortgage Crisis

The battle lines have formed in the political fight over the federal government’s response to the credit and mortgage crisis.

There are now two clear, and clearly different, strategies being put forward as the federal government attempts to deal with the credit and mortgage crisis — or is it the real estate crisis, the housing crisis, the foreclosure crisis, the liquidity crisis, the international banking crisis, the securities crisis, or all of the above?

One strategy relies on persuasion (and the credit industry’s recognition of group self-interest) and the other on force (and the belief that without the threat of force, individual self-interest will trump group self-interest every time).

The persuasion strategy belongs to the Bush administration, including the President’s Working Group on Financial Markets, and a majority of the Republicans in the House and Senate.

Their basic approach is to use their bully pulpit, as well as some incentives, to attempt to persuade the banks, lenders, mortgage brokers, and others in the credit industry to regulate and reform themselves.

As Treasury Secretary Henry Paulson put it, the Bush administration and the President’s Working Group on Financial Markets (which includes, in addition to the Treasury Secretary, the heads of the Federal Reserve Board, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission) want “to not create a burden” on the players in the credit industry.

They’re hoping that the industry will see that their own self-interest requires them to take the actions that the administration suggests in order to restore confidence and stability in the credit market.

For the most part, the Working Group’s recommendations would not require legislation, but would be implemented by the credit industry itself.

As the New York Times testily observed, the administration’s program, announced with such fanfare today by Treasury Secretary Paulson, “amounted to little more than demands that investors and financial institutions take greater care in analyzing and managing their risks.”

On the other side of the aisle, and from a different ideological perspective, the Democrats are pushing an agenda that relies far more on the force of government imposed regulations and the concomitant threat of legal sanctions.

The Democrats’ thinking is premised on the belief that even with the credit market in crisis, and even with the general recognition within the credit industry that new rules are necessary for the good of the game, the individual players will adhere to these rules only when they are forced to do so by federal regulators with the threat of punishment.

The Democrats are probably also thinking that a “tough” approach to the banks and the brokers will play well with the voters.

What will happen — will the persuaders or the punishers win out in the end?

Our view is that in the short run — that is, until after the November elections — the persuaders will stand their ground, even in the face of election year attacks from the Democrats, and resist the increasingly insistent calls for unleashing an armed federal force against the credit industry.

If the financial crisis worsens significantly, we would then expect that the Republican persuaders will have to make more concessions regarding legislation and federal sanctions, although we would still expect that these will be minimal.

On the other hand, if the Democrats win in November, persuasion will be dead and war will be declared.  Force would be used against the financial markets and credit industry on a major scale.

We could then see a comprehensive and sweeping legislative overall of the entire credit and banking industry even more extenstive than the Securities and Exchange Act.