Would a Bush Bailout Save the GOP? (FreeRepublic cited)

US News & World Report ^ | August 24, 2007 | James Pethokoukis

[2ndDivisionVet]

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."

[Crawdad]

I am my brother’s keeper. I am not your brother’s keeper.

[Dutch Boy]

Suppose a lender gave a borrower $250,000 for a home that was probably only really worth $175,000 in a "normal" housing market....

Isn't that what those late night get rich quick schemes pull? Barrow more than the house is worth then keep the extra cash? If the buyer is unaware I would think that kind of thing would be a crime. Some lawyer would have a cottage industry suing the pants off the sellers.

[Puppage]

I just think it’s a bad idea.

You got THAT right.