NYT: We need a bailout now!

June 15, 2008

The New York Times editorial board devotes today’s top editorial to criticizing the Bush administration, and John McCain, for doing “so little” in response to “the foreclosure crisis.” [Not the first time they’ve called for a bailout.] Doing “nothing” to prevent foreclosures will have an unacceptably large negative impact on the broader economy, they argue.

Naturally they favor Democrats’ favorite response to the crisis: “allowing bankrupt homeowners to have the terms of their mortgages modified under court protection.” They claim Barack Obama is on board with this proposal.

Have they considered the utterly ruinous effects of runaway litigation on other parts of the economy?

In the trial happy state of Mississippi, for example, potential employers wouldn’t open for business and doctors facing outrageous malpractice insurance rates simply left. But the governor was able to pass tort reform four years ago and employers and doctors came back (or at least stopped leaving).

Personally, I miss diving boards. They’ve all but disappeared due to sky-high insurance rates. Pool operators just can’t afford the premiums that insurance companies have to charge in a world where any injury can lead to a $5 million jury award.

Let’s imagine, for a moment, how much more mortgages will cost if they are all subject to judicial review. Behind on your mortgage payments? Sue the lender!

Perhaps the NYT editorial board should take a deep breath and consider the longer-term consequences of this proposal. Subjecting mortgages to judicial review and allowing judges to rewrite their terms will simply add to the cost of the mortgage to begin with. Over time, as the new “mortgage bar” brings more lenders to court, lenders will simply pass the cost of litigation onto borrowers themselves.

Do the Democrats and the NYT editorial board believe they are doing American home borrowers a favor by proposing solutions that, while “saving” perhaps tens of thousands from foreclosure, will end up increasing interest rates for tens of millions?

The only people that come out ahead would be the lawyers.

The WSJ article on diving boards cited above sums up the issue best:

…The diving-board dilemma is not just a legal matter; it’s a cultural one. We Americans have become so risk averse when it comes to our children that we now see unacceptable dangers from even the most routine activities. We have created peanut-butter-free school zones, “soft” baseballs, army figures without guns, parks without seesaws, and full body armor for bike riding.

It’s not just our children. And it’s not only activities that risk physical injury. In so many facets of our lives, Americans increasingly refuse to accept responsibility for their own actions or their own condition. We appeal to others, to courts, to the government for unlimited protection and to enrich or improve our lives for us.

It’s ironic: the NYT editorial board has argued that Wall Street should accept more responsibility for poor decisions made over the last few years: “if the objective [of Fed action] is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.” Hear, hear!

And they go on to bemoan how “financial barons” seek to “socializ[e] the costs of private bets gone bad.”

Of course this is exactly what subjecting mortgages to judicial review will accomplish: it will discourage borrower responsibility and it will socialize the costs of private bets gone bad.

And the rest of us will pay the price.

June 15, 2008

Foreclosures and the Election

There is much still uncertain about the future course of the home mortgage debacle, but one thing is now clear: Congress and President Bush have done so little for so long that they will never manage an effective response. Like so many other problems, the foreclosure crisis will be dumped on the next president and the next Congress.

The bad lending of the bubble years continues to wreak havoc. Foreclosures were up sharply again in May, and the continuing surge in defaults shows that more are in the pipeline. The pain goes beyond the ruin of individual families. Foreclosures are causing house values to plummet, local tax revenues to decline and credit to remain tight.

That, in turn, is prolonging the housing slump and deepening the broader economic slowdown, threatening the well-being not only of lenders and borrowers whose greed and misjudgment provoked the crisis, but of everyone. And, still, there has been no cogent response from Congress or the Bush administration.


That makes it important to judge what the two presumptive nominees, Senators John McCain and Barack Obama, are pledging to do to avert foreclosures.


Mr. Obama apparently has seen enough and has consistently pledged a broader range of initiatives. They include allowing bankrupt homeowners to have the terms of their mortgages modified under court protection, arguably the most effective way to stanch foreclosures. It is also the proposal most reviled by the mortgage industry and, as a result, has been rejected out of hand by the Bush administration.



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