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Republican Screw-Ups

No, not the Iraq War.  I want to talk about the other Republican screw-up…the sub-prime mortgage mess.  Paul Krugman covers it nicely today in his provocatively headlined column Blindly Into the Bubble:  Ayn Rand, chainsaws, and the housing crisis.  Krugman quotes Fed Chairman Ben Bernanke:

 Market discipline has in some cases broken down, and the incentives to follow prudent lending procedures have, at times, eroded.

Krugman humorously compares this to Emperor Hirohito's famous 1945 declaration of Japan's surrender:

The war situation has developed not necessarily to Japan's advantage.

The sub-prime mortgage crisis is Alan Greenspan's parting gift to the American people.  Voters should remember that this problem has occurred under a Republican president, a Republican controlled Congress, a self-proclaimed (Libertarian) Republican Federal Reserve Chairman Alan Greenspan, and is a prime example of the Republican economic policy of deregulation. 

The way I see it, the free-market fundamentalists can explain this in only one of two ways:

A)  This is one of those bitter pills that the American people will have to swallow on the road to economic freedom.  Government must not intervene while the market corrects itself.  You're on your own, even if 10 million of you lose your houses.

Or,

B)  We were all wrong.  We need a government bail-out.  (This is Alan Greenspan's new position.  Or, as Greenspan said recently, "Cash is available, and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this.") 

Somewhere, Ayn Rand is not very pleased with her sycophant. 

Putting aside for a moment my dark angel of Schadenfreude for the free-market fundamentalist's dilemma, the sub-prime mortgage mess is a true public policy issue.  Should the government intervene or not?  If so, to what extent?  My only hope is that if/when the government bails someone out, they will be at least as generous with homeowners as they will be with the investment class.

Notably, the sub-prime mess is a significant issue here in North Carolina.  This from a December 18 article on WRAL.com:  

Foreclosures have skyrocketed across North Carolina as part of the nationwide mortgage credit crunch. Statewide, 45,000 homeowners went into foreclosure this year, up 143 percent from a year ago. In Wake County, more than 4,000 people lost their homes, a 15 percent jump from 2006.

Since it is a presidential election cycle, a final note on Republican screw-ups.  Voters need to recognize that the Republican presidential contenders do not even consider these mishaps mistakes.  According to them, the problem is that America the Exceptional has used too little military force and has too much government regulation. 

In other words, they are happily running campaigns to the right of George W. Bush.  That's a campaign strategy that every Progressive will welcome as a holiday gift.

Speaking of which…happy holidays to all…time to go fight that war on Christmas!

9 Comments

  1. Max

    December 21, 2007 at 2:30 pm

  2. sturner

    December 21, 2007 at 2:59 pm

    Max is upset that I have not offered “substantive solutions” to the problems outlined in the post. To the contrary, my preferred solution was obvious…

    Stop Electing Republicans.

  3. Max

    December 21, 2007 at 3:30 pm

    Happy Festivus, Steve. See you in the New Year.
    (I might even take your advise and squander my vote on Mike Munger… You never know.)

  4. sturner

    December 22, 2007 at 9:42 am

    Max…”Serenity Now.”

  5. Pirate

    December 22, 2007 at 4:24 pm

    Before anyone starts attacking me for asking stupid questions I will admit that, being a poor college student who has never owned a house, I don’t have any experience with this topic. Having said that, can someone explain to me the concept of “predatory lending”? I ask because is it not true that the lender gets screwed, too, if the borrower has his/her property foreclosed? What incentive would a lender have to find someone who can’t possibly afford a purchase for the purpose of handing over a risky loan? Unless, of course, the lender is expecting a government bail-out of some sort.

    Sorry if this is a dumb question but I really am interested to know the answer.

  6. anglico

    December 22, 2007 at 8:46 pm

    What incentive would a lender have to find someone who can’t possibly afford a purchase for the purpose of handing over a risky loan?

    I’m no expert, but here’s how it was explained to me. There are a few angles to track.

    First, who’s really holding the mortgage. The representative or salesperson who does the deal in the first place often gets a commission with no risk exposure. The mortgages they make get bought and sold just like anything else. And the farther away you get from the original transaction, the less clear of a view the downstream buyers have of the risks. The complexity of the financing instruments has made visibility even worse. Companies have been buying mortgages without really understanding the layers of risk. Stupid, yes, but they’ve been doing it in spades.

    Second, up until now, lenders really haven’t had a problem with foreclosures. They get all the payments someone has made for five or six years . . . and they also get the house itself. Not a bad deal in normal times, because the lender could flip the house (sell it again) and be just fine. But with the volume of foreclosures going through the roof, there’s way too much supply and not nearly enough buyers.

    I’m sure it’s more complicated than this, but this is a start.

    Another driving influence is the quarterly targets mentality of many financial institutions. They often have to his a certain loan volume in order to keep the Street happy and to get their bonuses. So they lurch from quarter to quarter and look good on paper even though they’re rotting from the inside. The Big Cheeses get big bonuses and golden parachutes on their way out the door and the companies and their employees go down in flames.

    Theoretically, the whole system eventually manages itself into some kind of magical equilibrium according to the Free Market Gods. Which is all fine and good except for one thing: the word eventually.

    For example, in the health care free market place, everyone will eventually be happy in wellness nirvana. But between now and eventually, millions of people will suffer and die because they happened to be born in the wrong place or at the wrong time or with the wrong condition.

    Free market extremists (may I count you among them?) say “that’s just tough tomatoes.”

    It is definitely that.

  7. sturner

    December 23, 2007 at 7:39 am

    The Wall Street Journal has an excellent report here:
    http://online.wsj.com/article/SB119662974358911035.html

    …the most significant finding is that in 2005, 55% of sub-prime mortgagees had credit scores that would have qualified for prime rate loans (up to 61% in 2006). Furthermore, WSJ documents the confusion of buyers and the perverted compensation structure for brokers who persuaded buyers into taking loans with a higher interest rate than they might have otherwise qualified for.

    More on this here:
    http://blogs.wsj.com/economics/2007/12/19/schumer-presents-four-subprime-myths/

    …including the myth of expanded home ownership,etc.

  8. Pirate

    December 26, 2007 at 11:40 am

    Thanks for the info.

    angelico, I don’t think of myself as a free market extremist. I believe that more often than not freedom is superior to central planning. I believe government should intervene only as a last resort in situations where there is a market failure.

    In this case, it certainly appears that there were people who were victims of fraud. If this is the case, then there would be legitimate reason for government/legal action.

  9. [...] Originally Posted by gbone We, the public, have been hoodwinked by the stimulus packages. We were told and it his been sold that the stimulus packages were necessary to bailout financial institutions and create jobs. We were told that the sky was falling and if we didn't support the stimulus packages then disaster would occur. The bottom line is that a stimulus package is not a stimulus package but rather a trojan horse disguising what it really is, which is a tax increase. Bad housing and lending regulatory policy since the 1970s is a major culprit that has brought the United States to it's knees financially. Both major political parties contributed to this. In order to make up for the disastrous results of this bad policy the government need money….our money. They basically had two ways to get our money. First, our taxes could have been immediately increased which was not politically feasible at the time. Second, they could "borrow money" in the form of a stimulus package, which was the most politically feasible. The problem is that this "borrowed money" will have to be paid back(plus interest) and the only way to do that is increase taxes. Yes, the public has been hoodwinked. When we supported a stimulus package we basically supported huge tax increases in the near future to pay for both the "borrowed money" as well as the interest on the borrowed money. All that remains now is for the government to use enough crisis scare tactics to try and get support for tax increases and more borrowing. Scare tactics like the world will end as we know it if we don't pass a Cap and Trade bill. Scare tactics like the United States will go bankrupt if we don't increase taxes in order to lower our huge debt. We are like lambs being led to the slaughter. It's time for the public to wake up and demand that government(both parties) change it's ways so that individuals and families are not the ones left bankrupt in the end. I could go on and post more links, but why bother? The Progressive Pulse – Republican Screw-Ups [...]