Barack Obama has an article in the Financial Times about some of the lessons that need to drawn from the current financial meltdown, and both the title of his article(Fine unscrupulous lenders) and that of the accompanying analysis article by the FT (Obama unveils radical mortgage plan make it clear that this is not a shy proposal.
The implosion of the subprime lending industry is more than a temporary blip in our economic progress. It is a cancer that, given today’s integrated financial markets, threatens to spread with devastating impact to housing and to our economy as a whole, unless we act to contain it.
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Nearly everyone – from lenders to investors to borrowers – fooled themselves into thinking that what they were doing was low risk when it in fact involved a lot of risk.
The intro pulls no punches, and is very heartening to me - not because it's good news that a "devastating" financial crisis is likely, but because it is, as far as I can tell, the first acknowledgement by a senior politician anywhere of the gravity of what's unfolding.
If you read my diaries, you may have noted that I personally think that the financial crisis will be massive, and I also note how important it is that Democrats put the blame properly where it belongs, i.e. in the feudalistic, class warfare economic policies of the right, which use massive debt (borne by the poor) to hide the capture of an increasingly large share of the economic pie by the ultra rich.
The first step is to not deny the economic realities, and to speak up against that wall of debt, and it is good to see Obama making that step clearly.
It is also a parable about how an excess of lobbying and influence can defeat common sense rules of the road, placing both consumers and our nation’s economic well-being at risk.
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But we also know that Washington played a role. At a time when non-bank lenders were offering new kinds of mortgage, the federal government should have made sure it was all being done on the level. Instead, our government failed to provide the regulatory scrutiny that could have prevented this crisis.
The theme of fighting the corruption in Washington is one that has been played up already by Obama; what I'll note here is the affirmation of the role of government as regulator - i.e. as the entity setting the rules to ensure the common good via a level playing field (fairness) and enforcing them. We've seen time and again how the Bush administration not only has weakened rules applying to corporations, but has failed to enforce existing ones.
I think we also have to recognise what will happen if we reward the mortgage industry’s lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.
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If we are serious about stopping this crisis and preventing much larger turmoil in US housing markets, Washington needs to stop acting like an industry advocate and start acting like a public advocate.
Obama is playing a difficult balancing act: how to prevent the current crisis from hurting many Americans - thus effectively bailing them out from follies they entered into willingly - while making sure that this does not happen again. His solution is to focus the pain on the industry, arguing that too many people have been hoodwinked into mortgages they could not afford.
And that's where his radical solution comes into play:
We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners – at least until this crisis passes – is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.
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The rules currently governing mortgages were written in the 20th century to make borrowing easier to understand for borrowers. We need to update these rules for the 21st century and enact the regulatory and disclosure laws that the mortgage industry has been lobbying against.
That is why I have proposed a Home Score system that would create a simplified, standardised metric for home mortgages – rather like the annual percentage rate (APR), the effective interest rate a borrower ends up paying on a loan – allowing prospective home buyers easily to compare various mortgage products so they can find out whether they can afford to make the payments.
The first step is to make the industry pay as much of the cost of the bail out as possible. As any quick search attests, it is quite easy to find massive exemples of dodgy practices and outright fraud. But going after these on a large scale (if the goal is to fund something large nough to pay for any kind of bailout) is likely to require a lot of political will, something of course unlikely to happen before 2009 - which makes it an ideal opportunity to talk up the idea as much as possible, to put pressure on the mortgage industry and ensure that they more willingly accept tougher regulations for the future in any case.
And that's the second leg of Obama's plan, and one that can only be supported: bring in (or back) tough regulation of the industry. In fact, this is something that is required on a grand scale for the two industries that intersect in the mortgage industry: the financial sector in general (which has gone crazy in the past few years, fuelled by the geedy combination of cheap debt, complete deregulation and the promotion of greed as a positive value by the right and complacent media), and all industries providing consumer goods and services.
This is one of the core functions of government - to protect weak and isolated individuals against the abuses of large commercial players. That's why we have health and safety regulations, technical standards, and other consumer protection rules - not because people are irresponsible and need to be protected form their own stupidity or greed, but because of the inevitable assymetry of information between sellers and buyers (sellers know more about the products they are selling, and thus have a better idea of who's making a good deal), and because uniform rules and standards also provide level playing fields, legal certainty and stability over the long term. Letting the market sort out the good from the bad for mortgage providers has an incredible societal costs - it requires booms and busts in a sector that supports a big chunk of the economy and where most people have to make the biggest investment decision of their life (their house) and thus take the most risk in their life. Letting the naive or abused victims lose everything to weed out the "wrong" providers is simply socially unpalatable and unfair.
And anything, frankly, in today's environment, that puts government action and regulation of corporations in a good light for many people (and voters) is a good thing for any and all Democratic candidates to put forward.
So I hope that Obama's call is repeated and amplified. It's a move in the right direction and it's good politics - for everybody on the left.