The Democrats, ostensibly the party of the people, are too close to those at the top of the financial pyramid., It was Bill Clinton who signed into law some of the key legislation that loosened regulations on the most arcane derivatives. Chairmanship of Goldman Sachs seems to be the stepping stone to Secretary of treasury for both parties from Rubin to Paulson. Their careers were made by fostering aggressive speculation, with the well being of the those whose struggle along at less than a seven figure salary rather remote from their thinking.
But it will be those people who don't make great salaries, and now don't own their own homes, who will be among those forced to pay for this debacle. Hillary Clinton wants to protect the good "homeowners," the victims of predatory lending, but she is fostering a pernicious illusion. Those people who decided to take a mortgage on the appreciated bubble value of their homes, while mislead, were not defrauded by the lender. They got their money on the refi, or they got the house. When they took the bait to refinance to the max, they got that check for a hundred grand or several times that; and they got to spend it as they pleased.
The neighbor next to to him didn't get that check. They didn't remodel their home, or take that trip, or buy that new SUV. Or maybe the money was used for more admirable purposes, sending a kid to college, or taking care of an elderly parent. The point is that the person who signed a loan mortgage got to provide these service while their neighbor did not. Or maybe the neighbor was a renter, who was waiting for prices to peak, or didn't want to overextend himself. His prudence is about to be punished, severely, if Clinton gets her way.
The victims of predatory mortgages received their money, or they got their dream home, for which they agreed to pay back at the terms defined by the loan agreement. Many were mislead, but separating the greedy from the naive is an impossible task. Did they really believe that their home would continue to double in value every five years. Did they not realize that if it did, anyone who worked for a living would be consigned to paying rent for the rest of their lives.
The market system, individuals making personal decision on investments in their homes, is the best possible housing policy. Government does participate with tax benefits, mortgage guarantees, and numerous other involvements, but it is the individual who decides to invest in a home.
While we are focusing on the Real Estate Collapse, the pathology was the bubble, one that never should have happened. Free market principles are not negated by legal constraints, they are only made possible by them. It is the Bush Administration that willfully, and unconscionably abrogated its responsibility to curtail mortgage fraud.
Now the conundrum, one that is profoundly disturbing to me. The solution to the excesses, the pricing bubble and now it's deflation, can only be found in free market correction. And here's the rub. The only person who is advocating this is from the party that by it's collusion, distorted the free market, encouraged mortgage fraud, and precipitated a credit crunch that could bring the economy to the verge of collapse.
The logic of the Dodd-Frank bill borders on the absurd, "If we can bail out Bear Sterns, then we can bail out the homeowners." No. If it was wrong to bail out Bear Sterns then it is wrong to bail out homeowners. And the two action are separate, each with their own exigencies and consequences.
And of course there is the other unspoken aspect. Bailing out homeowners facing foreclosure is ultimately bailing out the commercial banks that will receive the government guaranteed mortgages. The Homeowners, are the conduits for taxpayers to bail out the financial corporations that engineered this disaster.
I actually like Obama's approach to the foreclosure problem, described in one of Krugman's earlier diaries:
Finally, Barack Obama’s speech on the economy on Thursday followed the cautious pattern of his earlier statements on economic issues.
I was pleased that Mr. Obama came out strongly for broader financial regulation, which might help avert future crises. But his proposals for aid to the victims of the current crisis, though significant, are less sweeping than Mrs. Clinton’s: he wants to nudge private lenders into restructuring mortgages rather than having the government simply step in and get the job done.
There are a vast majority of people of both parties who did not participate in the mortgage debacle of the last five years, who wouldn't think of overextending themselves with the expectation that their houses would always increase in value. When they realize that it is they who are the unwilling underwriters of this excess, they will not be happy.
Let's hope that Obama gets this right. There is a line to walk between Hillary Clinton and John McCain that will lead to the Presidency if done with integrity, skill and leadership. It is a rare election that provides candidates with such an opportunity to define themselves to the public.
