March 25, 2008
Hillary on housing
No sooner had I finished berating the candidates for failing to pay attention to the housing-finance meltdown than Hillary Clinton devoted a whole speech to the subject. And a pretty good speech too.
Not that I agreed with it all. I think the proposed 90-day moratorium combined with a “voluntary” five-year freeze on interest-rate resets is a bad idea: a drastic remedy, and yet to little effect. What is the point of prolonging the agony? And I cannot say I am impressed by the call for an “Emergency Working Group on Foreclosures”: a working group, even if it is a Working Group, is not a solution–though I grant you that the idea of putting Alan Greenspan (as Hillary suggests) on a panel to sort through a mess somewhat of his own making has a definite appeal. However, much of the rest of what Hillary said seems sensible. For instance, she agrees with Larry Summers’ idea for a new bankruptcy procedure that would curb repossessions and allow mortgages to be written down. Though she got the thing a bit muddled:
I’ve also proposed that we amend the bankruptcy code to give judges the discretion to write down the value of struggling families’ homes. Believe it or not, bankruptcy judges can write down the value of many other things to help families pay off their debt, but not their homes. They can write off the value or write down the value of second homes, which seems kind of ironic to me. Making this amendment to the code will help families in bankruptcy pay off their mortgages and stay in their homes.
It is not the value of the homes that would be written down, obviously, but the value of the mortgage debts secured against them. Assuming that is what she meant, I agree with her: it’s a good idea.
By the way, one argument offered against doing this (though it’s debatable whether it is in fact an argument for or against) is that it would discourage future mortgage lending. A recent study, “The Effect of Bankruptcy Strip-Down on Mortgage Markets” by Adam Livitin and Joshua Goodman, pours cold water on that notion.
The most important proposal was that the FHA should start buying impaired mortgage-backed securities–except that, to be precise, she only said that it should “stand ready” to do so. The question is, when and under what circumstances ought the FHA, or some other taxpayer-financed entity, actually start buying up this stuff. But I cannot be too hard on her for failing to answer that question because nobody else appears to know the answer either.
Firstly, the US is in the midst of a crisis that is weeks to months old in terms of the public discourse. It is imperative that the US Administration take the lead in setting policy initiatives or excuses. The US Congress should be its sparring partner, and Wall Street needs to demonstrate it is able to manage day to day. Five-fold rises in Fed-backed bids in as many days fails to make this last mark.
Secondly, the presidential campaigns should certainly address this matter as one of the candidates will pick up not only on unfinished business, but the consequences of today’s failed policies and failed responses.
Nonetheless, except in their roles as US Senators, they are outside the policy-making circle and must respect the potentially unsettling consequences of interjecting their thoughts–even sound ideas.
It is not difficult for any of us sitting 10 000 metres above this mess to have clear insights on how it should’ve been avoided or should be managed. The smartest recognise that they are not at the wheel, cannot read all gauges, and cannot feel the nuanced irregularities in the motor and through the chassis.
Mrs Clinton has demonstrated perhaps the sort of responsiveness we can expect from her. Quick, terse, harshly critical and shallow. Is it constructive? Is it well thought out? Does it tell us how she would not have us in the same position?
Hillary’s response today fails to confirm that she spent more than a weekend learning some timely principles and phrases. A few weeks ago she was extrapolating simplistic 21st-century macro theory from a spot essay by the ageing-if-venerable Paul Samuelson. First-year students would be expected to do little better, but she should be expected to when a bit of circumspection is good form. She should leave her team of analysts to liven up the broader debate.
Let us hope Mssrs Obama and McCain will tailor their comments to longer term economic policy and objectives. Until there is a president-elect one should not put much value in the words of those still sitting on the bench who are not on the roster.
Posted by: WCM | March 25th, 2008 at 6:38 pm | Report this commentCertainly, Hillary Clinton’s speech may be far from perfect. But, to their credit, both she and Senator Obama have been calling for effective regulation and for measures to relieve mortgage borrowers victimized by fraudulent lending. That is, it goes without saying, a great deal more constructive than idiotically bashing each other over Jeremiah Wright or, in the latest campaign inanity, the latest Hillary gaffe over the “gunfire” at the airport during her trip to Bosnia as first lady. Who cares?
Meanwhile, what does John McCain have to offer distressed subprime borrowers? “It is not the job of government to bail out and reward those who acted irresponsibly, whether they’re big banks or small borrowers.” (This, from today’s FT.) Thank you, Herbert Hoover.
The following quotes are as good a description as any of the subprime lending practices that played such a big role in creating this mess: “A vast amount of risky, if not downright fraudulent lending, promoted by equally risky finance”. Also, (speaking of subprime lending) “criminal and crazy”. These are not my words, which would not be worth very much anyway as I am not a financial expert. They are the words of Martin Wolf, writing in today’s FT. They should be taken very seriously. Both Democratic candidates appear to be on the same page with Mr. Wolf’s concludion that dereculation has reached its limits. Senator McCain, meanwhile, only seems to be interested in regulating Iraq.
Posted by: algasema | March 26th, 2008 at 2:03 pm | Report this comment“Mr. Wolf’s conclusion that deregulation”. Yet another apology for my awful typos.
Posted by: algasema | March 26th, 2008 at 2:07 pm | Report this commentOf course, Hoover was actively involved in inserting the government into the housing market and in imposing tariffs and trade restrictions, which is quite similar to the position of the two leading Democratic candidates.
There is an intense amount of commercials in Chicago right now telling customers to switch from adjustable rate mortgages to fixed, as the rates are low and predictable. Do we really need the government to come in and do this for us?
JBP
Posted by: John Powers | March 26th, 2008 at 3:42 pm | Report this commentJohn Powers, do you have any figures on the number of people so far who have actually been able to switch from adjustable to fixed rate mortgages? My understanding is that the lenders have been long on promises in this regard, but short on actual results.
Posted by: algasema | March 26th, 2008 at 7:56 pm | Report this commentAlgae,
No, but I doubt bankers/mortgage brokers are advertising for the benefit of the radio station. There must be a huge market out there of people that may have seen the light and want to convert to a fixed rate mortgage. We would not hear 3 advertisements every thirty minutes if bankers were not seeking business.
There are also a large number of people that could not afford a mortgage at any rate. Shouldn’t they be considering bankruptcy? More likely they will wait till they get some sop from the government to subsidize and encourage their bad judgement.
JBP
Posted by: John Powers | March 27th, 2008 at 1:43 am | Report this commentPerhaps one of the most troubling aspects of this residential mortgage crisis is the apparent disregard for the concept of the contract. How can judges and bankers simply reset impaired mortgages and minimise displacement or inconvenience? When calls to do so come from the Federal Reserve and now other central banks–and not consumer activists or sub-prime legislators–one can be certain that an entire generation will come to believe in a new and most forgiving god.
One can advocate accounting and other innovative solutions. One can accept that “compromises” of banking and finance principles are necessary, responsible and prudent. But little care is being taken in setting the context for such readjustments. Little attention is being given to the inherent unfairness for those whose assets are not impaired. I fear the core principles behind contract and property law have been put squarely at risk.
From another perspective, I am quite disturbed by what I am sensing is nothing less than collusion among certain actors in this drama on the international stage. This is not simply a mortgage banking or even a banking crisis. One can discern a new, post-Democratic world order smugly stepping to the fore. It seems to be further undermining the rules and borders within which most Europeans and Americans have thought they have lived with for at least the better half of a century, and often much longer.
The masses are bundled into Visa/debit card markets. And the Platinum Card set? What responsibilities do they think they have and to whom? The word “commonwealth” unlikely merits a place in a contemporary dictionary.
Posted by: WCM | March 27th, 2008 at 7:22 am | Report this commentApologies for taking more time than should be reasonably alotted this morning, but has anyone addressed the implications on US tax revenues not only from the macro hit of the mortgage losses, but also from the games that are now being played out in refinancings, defaults and foreclosures? Certainly the banks’ accountants see yet another bright side in this mess.
This should be of interest to the candidates as they anticipate their nation-building budgets.
Posted by: WCM | March 27th, 2008 at 7:36 am | Report this commentWhat is the point of bailing out Bear Sterns while doing nothing for 2 million homeowners, many of whom were the victims of egregious lending fraud? Again, I return to Martin Wolf’s description of the lending and banking industries’s subprime activities in his article yesterday: “criminal and crazy”.
Why does a shibboleth such as “sanctity of contracts” hold such great weight when a homeowner who was least likely to understand the terms of his mortgage is forced to (in Shakespeare’s words from the Merchant of Venice) “look to his bond”, while “sanctity of contract” is easily dispensed with as you and I pay for one Wall Street bailout after another?
And, for the benefit of my co-bloggers who may not happen to be lawyers, I might mention that an agreement procured by fraud is, in the eyes of the law, not a contract at all. Every first year law student knows this. No fraud you say? Then why is the FBI reportedly looking into just that in connection with the big subprime lenders, according to recent articles in the FT and elsewhere? So much for “sanctity of contracts”. Let Countrywide, Bear Sterns, and the other lenders and investment bankers who packaged fraudulent loans into equally fraudulent securities “look to their bonds”.
We are not dealing with a contract, or even a financial issue here, but a class issue. Our society is based on the idea that the role of government is to ensure the welfare of the wealthy elite, while impoverishing those who are not among the privileged. We are seeing this with the subprime crisis. We have also been seing it with the Iraq war, in which Halliburton has made billions and the oil companies are still hoping to do the same, while disabled veterans at Walter Reed have to buy their own food and pay for their own phone calls.
Posted by: algasema | March 27th, 2008 at 1:21 pm | Report this commentWhile formerly highly paid Bear Stearns executives who are paid in shares and options lose 14/15 of their value, as well as their retirement savings, it is hard to imagine a world where this is a “class issue” rather than a systemic problem of risk and regulation. Countrywide, Bear Stearns, Washington Mutual, Citibank have been smashed by the market-not by “class issues”, as well they should.
Some people do not make enough money to own the home they have purchased. So what? That is not a class issue. Losing a home that has no equity value is a 0$ transaction.
JBP
Posted by: John Powers | March 27th, 2008 at 2:23 pm | Report this commentWhere class comes in, JBP, is whenever the government tries to insulate those who are best able to take care of themselves from the consequences of their own mistakes, while doing little or nothing to help those who are least able to look out for their own interests in our dog eat dog, laisser faire, social Darwinist financial system.
Question: Did the “market” bail out Bear Sterns and Northern Rock? Is it the “market” that has been pouring in “liquidity” to keep our rotten financial system going as if there were no tomorrow?
Posted by: algasema | March 27th, 2008 at 5:14 pm | Report this commentIf being insulated by the Feds results in me losing my retirement account, I certanly would not want to be insulated.
My understanding is that Bear Stearns etc could have sold their assets for a much higher figure than offered by the Fed, but buyers were reluctant given the Feds insistence on intrevention (and perhaps some liability shield to BSC for their mis-priced assets)
I don’t see that it should matter much to the class warriors whether a wealthy person loses 98% of his wealth or 100%. What is the point of holding out for the last 2%?
The Feds bailed out the system. I would have preferred that they let the rotten apples fall to the ground on their own, but it certainly is not a matter of giving money to the wealthy, when the same people just lost the vast majority of their assets.
JBP
Posted by: John Powers | March 27th, 2008 at 7:10 pm | Report this commentJimmy Cayne has managed to unload his shares in Bear Sterns for $61 million immediately after JP Morgan Chase mysteriously raised its offer from $2 to $10 per share. True, Caynes could have sold out for a billion dollars earlier. But why should the Fed, i.e. the US taxpayer, have anything to do with helping him, and people like him, get anything out of the company at all?
And if 2 million unsophisticated subprime borrowers who were in no position to understand the terms of complex 40-page loan documents lose their homes and/or their life’s savings, is not that “systemic” too?
Posted by: algasema | March 28th, 2008 at 3:03 pm | Report this commentApparently, other people thought the company was worth more than $2 per share. Regardless, Cayne and many others took a huge hit, who cares if it was 98 or 99% of their wealth…the market massively punished these guys.
Had a thought, (column!) The capital gains tax is pretty much eliminated on home sales. The guys who sold houses worth say 100k to some poor sucker for 200K got away without paying a dime in tax. There is a systemic problem for you.
JBP
Posted by: John Powers | March 28th, 2008 at 7:57 pm | Report this commentIf Hillary Clinton, and I believe John McCain as well, had not voted to overhaul the U.S. bankruptcy laws in the early 00s, homeowners would not currently be in the mess that they are. It used to be that someone could file for bankruptcy protection by filing chapter 7 which would enable the person to maintain property (such as a house). But this is no longer easily possible if one’s income is of a certain level.
It is curious to me that while banks were being deregulated that bankruptcy laws were being tightened. Bait and switch is the general term for such a practice.
Posted by: Michelle | March 29th, 2008 at 6:49 am | Report this commentMichelle,
Mortgages are pledged assets. Most defaults on mortgages are not part of a bankruptcy proceeding. The mortgage “crisis” has little to do with changes in bankruptcy laws.
Even if there is a bankruptcy, in most states your pledged assets, regardless of whether that asset was your homestead could be assigned to creditors.
Tell me again why someone should keep a house he cannot afford after defaulting on a mortgage?
JBP
Posted by: John Powers | March 29th, 2008 at 1:52 pm | Report this comment