GWB’s embattled Secretary for Housing and Urban Development is expected to resign tomorrow according to the Journal.
HUD, usually a backwater federal agency, has been at the heart of the administration’s attempts to ease problems for homeowners. Although Treasury Secretary Henry Paulson has taken the lead on many initiatives, Mr. Jackson has been a partner on many, including programs such as Hope Now, an administration-backed industry plan to loosen the terms on hundreds of thousands of subprime mortgages.
HUD also runs the Federal Housing Administration, a big government division that insures mortgages for low-income homeowners and first-time home buyers. Many Democrats and Republicans have envisioned expanding the power of FHA to play a bigger role in stabilizing the mortgage market.
Mr. Jackson’s problems stem from his refusal to answer questions about his role in a Philadelphia redevelopment deal. The city’s housing authority has filed a lawsuit charging that Mr. Jackson tried to punish the agency for nixing a deal involving music-producer-turned-developer Kenny Gamble, a friend of Jackson.
Separately, a report from the department’s inspector general found what it called “some problematic instances” involving HUD contracts and grants, including Mr. Jackson’s opposition to money for a contractor whose executives donated exclusively to Democratic candidates.
Could this be good news? I think Jackson is one of Bushie’s original team of advisers, the one driven by loyalty more than competence–Rumsfeld, Tenet, Brown (at FEMA), Gonzales, Miers (who he nominated for the supreme court before it was learned she couldn’t complete an English sentence). The others didn’t survive so long, perhaps because they had higher profile jobs. I’m guessing it’s easier to hide incompetence or cronyism at HUD.
I say this could be good news because it could be an opportunity for Bush to get a ringer to do the job. The present economic crisis has been described by even the most sober observers as the worst economic disaster in generations. We’ll need steady, smart hands to get us through it.
We are VERY fortunate, I think, to have Bernanke and Paulson leading the charge here. Bernanke may be America’s greatest living scholar of the Great Depression. Particularly at this moment, when we face the largest banking crisis since the Great Depression, it’s good to have an expert at the helm.
The same is true of Hank Paulson. If the American housing crash is the underlying catalyst causing the earthquake in the world financial system, it could be argued that Wall Street is at its epicenter. Before going to Treasury, Paulson was the CEO of Goldman Sachs. He knows Wall Street. We know this because Goldman under his leadership always outperformed it…
Indeed Bernanke’s and Paulson’s actions have so far proven very prudent. They’re taking appropriately aggressive action while doing a good job to avert overt government bailouts. Some of their solutions have been totally original and almost ingenious. The “bailout” of Bear Stearns wasn’t much of a bailout, what with equity holders getting completely wiped out. And the Fed’s various lines of credit to Wall Street and Main Street are only that: credit lines. The Fed is NOT “printing” money in a misguided attempt to recklessly inflate our way out of this crisis.
HUD is more important than ever. Hopefully Bush finds another accomplished technocrat to fill the job….and quickly.
[If you didn't follow the Harriet Miers link above, here's another opportunity. It's hilarious.]
The factual error occurs in the mortgage model Mr. McCulley displays in his article. It is not a big issue, but when someone uses a specific example, then the example has to be factually accurate.If you turn the microsope to the other end of the mortgage system, away from Main street, to Wall Street and, for our purposes here, Washington Street, the example might look like this:In the post dot com/twin towers era, the Money Men looked for new worlds to develop, and they found the mortgage and housing markets. So them fed the beast that was thirsty with pentup demand for housing and cheap, easy mortgage money, and Wall Street tasted success, and Washington Street was happy too. So encouraged, they fed more of their intoxicating products into the system and THEY (Wall and Washington Streets) reaped more and more benefit…with little regard to any reasonable risk managment consideration. Values went up, paychecks and bonuses were huge, constituants were becoming happy homeowners, and life was great on Wall Street and on Washington Street. To paraphrase/write over the article, and this is not easy, but it makes a point: “Minsky’s hypothesis explains why the downturnoccurred. MORTGAGE PROFITS AND PROPERTY prices had been rising at a steady and stable pace , for a long period, so WALL STREET & WASHINGTON STREET walked the path from hedge units to speculative units and, finally, to Ponzi units. In the midst of the exuberance, the rising PROFITS were a self-fulfilling prophecy. As WALL STREET & WASHINGTON STREET walked, THEN RAN down the Minskypath, they drove up the value of the collateral AND THEIR HOLDINGS. Very few defaults were occurring because ACTUAL borrowers do not default when they are making EARNING PAYCHECKS and WALL STREET & WASHINGTON STREET WERE THRILLED BECASUE THEY WERE MAKING HUGE moneyOne should realize that what was happening, in effect, was that by 2006, WALL STREET & WASHINGTON STREET WERE GRANTING THEMSELVES, THROUGH marginal borrowers, a free at-the-money call option on the value of THE BORROWERS property AS IT RELATED TO THE VALUES OF THEIR MORTGAGE PROFITS. As the BORROWERS property market continued to go up, the default rate on the mortgages was low , SO WALL STREET WAS ABLE TO LEVERAGE MORE PROFITS THROUGH THEIR CREATIVITY, HEDGED BY because borrowers’ PAYMENT STREAMS AND PROPERTY VALUES, AND WASHINGTON STREET BASKED IN THE GLORIOUS LIFE THEIR CONSTITUANTS WERE LIVING.If BORROWERS defaulted on their mortgage, they gave upthe in-the-money portion, AND WALL STREET & WASHINGTON STREET WERE STILL IN GOOD SHAPE. UNFORTUNATELY FOR ALL, 2006 BECAME 2007, AND BY MID YEAR THE MORTGAGE LENDING AND LEVERAGE SYSTEM, DEVELOPED BY WALL STREET & SO APPRECIATED BY WASHINGTON STREET, WAS BEGINNING TO UNRAVEL…SO WALL STREET ABANDONED THE HOUSING MARKET AND THE EVER TRUSTING (BY IN LARGE) BORROWERS TO ITS OWN DEMISE, & WASHINGTON STREET BEGAN TO NEAGTIVELY CATEGORIZE AND CRITICIZE, AND THE SYSTEM DEVELOPED BY WALL STREET & EMBRACED BY WASHINGTON STREET TRANSITIONED INTO THE last stage of the Minsky journey from speculative to Ponzi. I really believe that the market makers and managers bear the brunt of the responsibility for market dislocations such as we are now experiencing, and they are found on WALL STREET & WASHINGTON STREET.