Posted on 08/25/2007 12:09:28 AM PDT by 2ndDivisionVet
Edited on 08/25/2007 10:13:31 AM PDT by Admin Moderator. [history]
The last politician who took advice from the bond market was Bill Clinton. When he pushed for a tax hike back in 1993 to cut the budget deficit, it was under the assumption that bond investors would respond by bringing down interest rates. (The theory here is that deficits are inflationary. Inflation is bad for bonds.) Yet long-term interest rates surged from 6.45 percent when Clinton signed his tax-hike bill on Aug. 10, 1993, to 8.16 percent on Nov. 7, 1994, the day before the midterm congressional election where Republicans won back the House and Senate.
Now PIMCO's Bill Gross, perhaps the most well-known bond fund manager in the world, is giving President Bush and the GOP some advice. He wants the government to start cutting checks to struggling homeowners, as both good policy and smart politics. (Bush has already ruled out any direct payments.) As Gross wrote in his recent letter to clients:
"The ultimate solution, it seems to me, must not emanate from the bowels of Fed headquarters on Constitution Avenue, but from the West Wing of 1600 Pennsylvania Avenue. Fiscal, not monetary policy should be the preferred remedy, one scaling Rooseveltian proportions emblematic of the RFC, or perhaps to be more current, the RTC in the early 1990s when the government absorbed the bad debts of the failing savings and loan industry...This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hardworking Americans whose recent hours have become ones of frantic desperation...And if you're a Republican office holder, you'd win a new constituency of voters—"almost homeless homeowners"—for generations to come. Get with it, Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Re-establish not the RFC or the RTC, but create an RMC—Reconstruction Mortgage Corporation...Write some checks, bail 'em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all, "W," you're "the Decider," aren't you?"
My take on this:
1) This would totally alienate conservatives, many of whom were pretty disgusted heading into the 2006 election with what they perceived as the free-spending ways of the White House and the GOP-led Congress. Here are three pretty typical responses to the Gross bailout idea posted on the conservative Free Republic message board: "Using whose money? Mine? In a pig's eye. I work for MY home, not yours." "Why is it that I, who [watch] what I spend, put 20% down on my home, got a conventional 30-year loan and make my payments on time get nothing while some want the government to bail out stupid people?" "I hope every home squatter that signed those mortgages gets put out on the street!"
2) Talk about playing on someone else's home turf. Any Bush bailout idea, if he should propose one, would inevitably start a bidding war with Democrats. Hillary Clinton, for instance, has already proposed a billion-dollar fund to boost state programs that help at-risk borrowers avoid foreclosure. I don't see why the Republicans would get more credit than the Dems.
3) We're not talking about a very big constituency here. Research firm First American CoreLogic projects 1.1 million subprime-related foreclosures, spread out over a total period of six to seven years. And it's blue state California—which Democrat John Kerry won by 11 points in 2004—where most of the trouble is, with a reported 39,013 foreclosure filings in July, the most of any state for the seventh month in a row and up 289 percent from July 2006, according to RealtyTrac.
4) Not that politicians necessarily care, but the economics of a bailout are pretty iffy. As U.S. Appeals Court Judge Richard Posner, a guy who specialized in the effect of economics on law, notes in the blog he shares with Nobel Prize-winning University of Chicago economist Gary Becker:
"The only justification for bailing out risk takers is to avoid a depression (or as it is politely called nowadays, a "recession," but, oddly, the worse the macroeconomic consequences of a speculative boom and bust, the stronger the argument for punishing the risk takers (which include both borrowers and lenders) by not bailing them out. ... If the government relieves risk takers of the consequences of their risks, there is a divergence between social and private risk. An example is subsidized flood insurance, which leads to excessive building in floodplains. ... Moreover, government intervention to help lenders and borrowers invites further government regulation—for example, limits on subprime lending. There is no more reason to discourage risk taking than to bail out the risk takers when the risks they have voluntarily assumed materialize."
bttt
You have no promise of tomorrow.
Even without religion that’s simply a fact.
Good point. WELCOME ABOARD!
But it is accurate to say the problems now are much more than just the subprime market. They may have started there - the schematic might look like: subprime, Alt-a, (bear stearns takes haircut) prime mortgage industry locks up, stock market turns on a dime, then commercial paper freezes up.
And this isn’t acknowledging the subprime exposure overseas which is considerable.
a lot of people are saying “screw the lender” actually, from anecdotal observation anyway. Loaning more than say 80 per cent of market value doesn’t make any sense. That way if the borrower defaults the lender doesn’t take a loss, or much anyway. And there are accounting devices and tax issues that come into play.
well - housing appreciation has been part of the attraction of homeownership in the US for many years. Truth is most people don’t want a lot of money or at least arent willing to work for it, they are deathly afraid of the stock market because they don’t understand it. You might say they are stupid, and some undoubtedly are, but a house means a place to live and in the past a dependable source of income or equity. It takes guts and hard work to be successful in real estate but undoubtedly there is at least one guy out there livin large at a fully paid house that is the net proceeds of a dozen 0 percent down credit cards and a few savvy flips at the height of the bubble. But even staid Americans have traditionally used the gently rising housing market as a sensible way of making money.
Agreed. It’s very difficult to learn from one’s mistake if you don’t pay a price.
So after taxes rise so that the Federal Government can afford to bail out people whose wages rise insufficiently to pay terrible mortgages, who bails out citizens who cannot afford their taxes, food, and housing expenses simultaneously even if their incomes rise? This sounds like a way to get aboard an endless cycle, and only the banks win.
START
Some people get unreasonable mortgages from banks.
Banks threaten to foreclose on people who cannot pay mortgages.
Federal government pays some people to pay banks for mortgages.
Federal government raises taxes on ALL citizens.
Citizens cannot afford to pay taxes, food, and previously “affordable” mortgages; many employers cannot pay both taxes and wages to citizens, who consequently lose their jobs, making their mortgages unaffordable.
RETURN to START and REPEAT.
Then we have the ancillary effect of people purposely getting unaffordable mortgages because they know that the Federal government will give them money to pay that mortgage. If this phenomenon happens with sufficient frequency, then we effectively untie the nominal price of housing from the costs of obtaining it to many/most citizens. This dichotomy currently afflicts the medical industry, where people get health care, but employers and government agencies (mostly) pay for it. This disconnect worst afflicts those somehow ineligible or unable to pass their cost burden to a third party.
We do NOT want to go down this road, folks; followed to its logical conclusion, it leads to “socialized housing,” wherein everyone resides in the “projects,” howsoever the government tells them to live.
Well, I guess as a form of very-low-return forced savings housing is an "investment".
But that bears no comparison to the insane housing bubble of 2001-05.
When the value of Krugerrands, Beanie Babies, or tulips goes stratospheric, the average prudent J6P's life is not seriously affected.
But when 1500 square foot houses in middle class neighborhoods start getting bid up to the point where it takes an 90th percentile income to afford one (without a toxic mortgage), we are talking serious damage to our way of life.
Good points. I suspect it’s also an opening for the left to demagogue as if the “RICH” Republicans aren’t in touch with ‘the people’ and need to be kicked out so someone who is more in tuned can take over.
Thanks. And good for you and good for your adult kids. That’s the right track IMO.
Well that’s all rather relative. Interest rates today are quite low by historic standards.
It’s sort of like the guy who gets things done. Because he does, he’s always the one asked to do more. Since you’ve been so good at paying yours, pleae step in and pay theirs...
The government will be tempted to take your tax dollars and bail people out. I just think it’s a bad idea.
Thank you.
Your exactly right IMO.
Rates are too high relative to other rates in the yield curve. And as far as history goes, what period are you talking about? I have a daily history of funds rates going back to 1954 in my other browser window.
Try looking at the rates around 1977 forward. If those rates are in fact lower than today, I’ll be very surprised.
Why choose one of the most inflationary periods in our country’s history? If one looks at the entire history of our country a 5% rate is very high. Nonetheless, a current indicator of market rates should be used to determine the funds rate, not historical.
Thanks for the response. I think your overall point is valid as far as how that period applies. It was long enough to cause severe problems though. It’s certainly not something that should be shoved under the rug.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.