James Pethokoukis

Politics and policy from inside Washington

An August Surprise from Obama?

Aug 5, 2010 04:26 UTC

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:

1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.

2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:

GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.

And this from Mizuho Securities:

As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping  up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.

Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.

3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.

But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

4) And don’t think the White House is worried about financial market reaction. If they thought it would pass Congress, they would be submitting a $200 billion Stimulus  2.0  (3.0?, 4.0?) right now.

August is supposed to be a slow month for Washington politics. But maybe not this one.

COMMENT

HUD recently sent a letter to mortgagees/lenders basically encouraging them to reduce principal on mortgages where the principal amount exceeds the home value. The Treasury provides the lenders and 2nd lein holders monetary incentive paid for by the U.S. Taxpayer.
(the formula for determining their incentive payment can be found here: https://www.hmpadmin.com/portal/docs/ham p_servicer/sd1005.pdf

I don’t know about you, but I have paid my mortgage payments during the past 20 years even when my principal owed was more then the value of my home in the 1980′s. Purchasing a home is a long term investment. The value changes with demand for homes.

As long as the borrower has the means to pay their mortgage they should not have their loan modified and principal forgiven at the expense of taxpayers.

Even those that are behind on the mortgages should only be provided the opportunity to refinance at the current historically low interest rates; and only if they qualify. Too many of these rewritten loans have defaulted a second time at the expense of taxpayers.

If a lender wants to avoid a foreclosure by reducing the principal and rewriting the loan at current interest rates it should not be done at the taxpayers expense. It is to their own advantage to do so as if they foreclose the house will likely sit there and the cost of maintaining it and advertising it will far outweight reworking the loan with the borrower.

Fannie and Freddie are still making loans that do not require even 10% down. They continue to buy bad mortgages and now the Treasury is going to give them Billions more and are authorized to continue to do so.

Enough already. No more Federal Money to bail out Fannie and Freddie which are now basically owned by the Federal Government. It has to stop.

This is why they didn’t include them in the new Financial Regulations Bill which the Dems said did not promote bailout financial institutions because they were too big to fail. They knew they would be bailing out Fannie and Freddie for years.

Posted by fedupwithfedgov | Report as abusive

The political blowback from healthcare reform

Dec 18, 2009 19:20 UTC

Kim Strassel of the WSJ states her case:

1) Consider North Dakota. A recent Zogby poll showed 28% (you read that right) of state voters support “reform.” A full 40% said they’d be less likely to vote for Democratic Sen. Byron Dorgan next year if he supports a bill. In a theoretical matchup with Republican Gov. John Hoeven (who has yet to announce), Mr. Hoeven wins 55% to 36%. Mr. Dorgan has been in the Senate 17 years; he won his last election with 68% of the vote.

2) In Arkansas, 32% support this health-care legislation. Sen. Blanche Lincoln, also running next year, trails challengers by more than 50 points among the 56% of voters who strongly disapprove of the health plan.

3) Senate Majority Leader Harry Reid, the public face of health reform, can barely break 38% approval in Nevada.

4) In Colorado, where 55% of voters oppose a health bill, appointed Democratic Sen. Michael Bennet told CNN he’d vote for a bill even if it “cost him his job.”

5) In deep-blue Delaware, 46% oppose the health plan. Democrats pounded Delaware GOP Rep. Mike Castle, running for Senate, for voting against the House bill. That vote has in fact kept Mr. Castle leading his expected opponent, Beau Biden, the vice president’s son.

6)  In the past weeks, four well known House Democrats announced they will not run for re-election. All are longtime incumbents; one, Tennessee’s respected John Tanner, co-founded the Blue Dog coalition. These folks have seen the political handwriting on the wall.

So why the stubborn insistence on passing health reform? Think big. The liberal wing of the party—the Barney Franks, the David Obeys—are focused beyond November 2010, to the long-term political prize. They want a health-care program that inevitably leads to a value-added tax and a permanent welfare state. Big government then becomes fact, and another Ronald Reagan becomes impossible. See Continental Europe.

Me: Yup. Ds, who also no doubt think healthcare reform is good and moral policy, see a long-term political advantage.  Indeed, they often talk about the structure of reform as more important than details. Those can come later. But change the structure of 1/6th (and climbing) of the nation’s economy and you change its politics, too.

COMMENT

The truth is that Congress wants to escape any suggestion of having to pay for healthcare benefits, and would prefer that corporations pay the bill and “hide” the cost from consumers.

A more honest health policy was presented in detail by Ezekiel Emanuel, which would have paid for universal healthcare with a dedicated value-added tax. It would have been progressive in that the cost would have burdened citizens in proportion to their consumption which is directly related to their disposable income. And, since everyone would pay for healthcare this way, those who now receive free attention in hospital emergency rooms would also contribute.

The VAT would have put the focus on the direct cost of healthcare in the percentage level, so citizens would be aware that demands for increased services would have an impact on their ability to pay for other things. Healthcare expenditures are now around 17% of GDP and will represent fully one-fifth of GDP by 2018.

Replacing the direct corporate burden of healthcare premiums with a VAT would have removed a major cost disincentive to employment, and would also have made imports share the burden equally with domestically produced goods and services. And, because the VAT is a border-adjustable tax, so used for healthcare insurance, it would have been subtracted from exports making our products more competitive abroad as well as at home.

Too bad this plan did not receive more attention from the press as well as the Congress.

Posted by SteveA | Report as abusive

Goldman Sachs still believes in the New Normal despite rosier growth forecast

Dec 15, 2009 13:58 UTC

Goldman Sachs has boosted its 4Q GDP outlook to 4 percent from 3 percent, yet continues to believe in the gloomy New Normal. Here’s why:

By our estimates, fiscal policy contributed around 2½ percentage points (annualized) to real final demand growth in the second half of 2009. …  The conclusion thus seems to be that fiscal policy has been responsible for most, if not all, of the growth of final demand in the second half of 2009.

While fiscal policy will remain supportive to growth for most of 2010, the size of this boost is set to decline, modestly in the first half and sharply in the second half. (Indeed, our current estimates imply a negative impact in the fourth quarter, although this is obviously subject to new congressional initiatives as the midterm elections approach.) This means that we need an underlying improvement in final demand just to offset the impact of policy through 2010. While we do expect such an improvement, we believe it will be U-shaped rather than V-shaped and hence insufficient to produce an acceleration in final demand growth once the fiscal pattern is taken into account.

Me: Moreover, the firm still thinks job growth will only average 100k a month, not counting census temps. If that number shot up to, say, 250k a month — a level that would really start lowering the unemployment rate, the firm said it might change its view that the private economy was still muddling through at a 2 percent GDP rate without government steroids.

‘A whole mess of crazy’ coming from Capitol Hill

Nov 20, 2009 14:11 UTC

That is how one Congress watcher from the financial industry describes the current state of affairs, from the Fed audit bill to calls for a transaction tax. I think this William Greider piece gets at the heart of it:

The center is not holding. … It feels like carnival time, when up is down and down is up, when humble folks parade as kings and queens and the reigning royals are dressed as clowns. … The most startling evidence of reversal is Chris Dodd, chair of the Senate Banking Committee, who has been a loyal friend of Wall Street and especially Connecticut-based insurance companies. Dodd proposes to strip the Fed of its regulatory functions because of its “abysmal failure” to protect the public, and to replace it with an overarching regulatory administration. …
Taxing Wall Street is a more provocative departure, but some representatives are warming to the idea, drawn to Oregon Representative Peter DeFazio’s appealing Let Wall Street Pay for Wall Street’s Bailout Act. A very small excise tax on all financial transactions–trading stocks, bonds and derivatives–could yield hundreds of billions in revenue. House majority whip Jim Clyburn suggests the securities tax is “a painless way” to pay for highways. …

Senator Bernie Sanders asks another one. If some banks are “too big to fail,” why not just make them smaller? His bill would require Treasury to identify and break up too-big financial institutions within one year. Goldman Sachs and JPMorgan Chase are reacting with alarm. They do not normally worry over the senator’s progressive thinking, but what’s dizzying is that former Fed chair Alan Greenspan has embraced the same concept. When the socialist from Vermont achieves bipartisan consensus with the right-wing Maestro, can Barack Obama be far behind?

Best campaign tag line …

Aug 18, 2009 14:28 UTC

… comes from my pal Dan Proft who is running for governor of Illinois: “Illinois isn’t broken. It’s fixed.” Nice.

COMMENT

is that a concession, or a declaration that he’ll win?

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