Keeping People in Their Homes

On the day it was announced that he had won the Nobel Prize for Economics, Paul Krugman joins NDN in singing the praise of Gordon Brown and in asking the question the public, the media and Congress must be asking - why did this White House get it so wrong?

At a special European summit meeting on Sunday, the major economies of continental Europe in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts. And whaddya know, Mr. Paulson - after arguably wasting several precious weeks - has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities (although he still seems to be moving with painful slowness).

As I said, we still don't know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?

It's hard to avoid the sense that Mr. Paulson's initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as "private good, public bad," which must have made it hard to face up to the need for partial government ownership of the financial sector.

I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson's fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn't making sense.

Luckily for the world economy, however, Gordon Brown and his officials are making sense. And they may have shown us the way through this crisis.

From the WSJ tomorrow (via MSNBC) an article that offers more evidence that much more pain is to come, and that we must find a way to keep people in their homes:

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults - the very misfortune that touched off the credit crisis last year.

The result of homeowners being "underwater" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners underwater is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30 percent in some areas, roughly 12 million households, or 16 percent, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4 percent underwater in 2006 and 6 percent last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners underwater in this period than any time in our history."

As some of you may be aware our office is right across from the Treasury Building.  I can see Paulson from my front porch, so to speak.  

A few minutes ago a very loud protest began outside Treasury.  It is angry, loud, unnerving. 

For those in Congress looking to but a deal back together I hope they consider what has happened to the American middle class this decade.  The typical family is making less money today than when Bush took office.  Those in bankruptcy, with homes foreclosed upon, in poverty and without health insurance have risen.  Every day anger at the economy drove the GOP from office in 2006 and is driving the national debate today.  Given all this it was almost unbelievable that Congress would pass the 1st Bush Bailout Bill which had so little obvious benefit for those struggling harder and harder to make ends meet.  It is why the calls coming into Congressional offices are running big time - 30 to 1 in some offices - against the deal.  

The economic performance of the Bush era has been an epic failure.  A lower standard of living for the typical family.  Rising poverty and those without health insurance.  Out of control spending balanced with dramatic tax cuts for the wealthy creates a structural budget deficit and a huge increase in the national debt.  American support for global economic liberalization dramatically recedes, and the new global trading round - Doha - fails.  Needed investments in our kids, our skills, our infrastructure, the all important transition to a low carbon economy all put off.   Umployment rising.  Collapsing housing and financial markets. Bush's economic stewardship has been disasterous for America - why should we expect him to all of a sudden to get a major financial crisis right? 

Our advice to Congress - put real provisions to keep every day in their homes as part of the final deal or don't be suprized if the American people and very real voters spit the bit.  The American people are tired of a government more concerned with things other than their increasingly difficult struggle to get ahead.  This debate is a time - even this close to the election - where Congress and the President can acknowledge that the struggle of every day matters to them as much as the struggle of big banks.  This isn't that hard my friends.  Keeping people in their homes is both the right economic thing to do and the right moral and political one as well.  

If you are looking for a plan on how to do it give Hillary Clinton a call.  She has a good one.

We will have more to say on the bailout bill a little later today, but for now I found these essays by Larry Summers, Paul Krugman, Robert Samuelson and Steven Pearlstein helpful.

For both economic and political reasons, we start the morning disappointed more wasn't done to keep people in their homes.  

In a powerful lead editorial today, What About The Rest of Us?, the NYTimes echoes NDN's calls to make keeping people in their homes the core of the final financial rescue package:

Lawmakers were still wrangling Thursday night about the Bush administration's $700 billion bailout of the financial system. Political theater was mainly responsible for the delay, but it will be worth the wait if lawmakers take the time to make sure that the plan includes real relief for homeowners and not only for Wall Street.

The problems in the financial system have their roots in the housing bust, as do the problems of America's homeowners. Millions face foreclosure, and millions more are watching their equity being wiped out as foreclosures provoke price declines.

The problems became even more evident Thursday night with the federal seizure and sale of Washington Mutual to JPMorgan Chase.

It's unacceptable that lawmakers have yet to come out squarely in favor of bold homeowner relief in the bailout bill. Treasury Secretary Henry Paulson, the biggest advocate of bailing out Wall Street, is also a big roadblock to helping hard-pressed borrowers. He wants to keep relying on the mortgage industry to voluntarily rework troubled loans, even though that approach has failed to stem the foreclosure tide - and does a disservice to the taxpayers whose money he would put at risk in the bailout.

The New York Times offered these thoughts this morning:

Absence of Leadership

It took President Bush until Wednesday night to address the American people about the nation's financial crisis, and pretty much all he had to offer was fear itself.

There was no acknowledgement of the shocking failure of government regulation, or that the country cannot afford more tax cuts for the very wealthy and budget-busting wars, or that spending at least $700 billion of taxpayers' money to bail out Wall Street and the banks should be done carefully, transparently and with oversight by Congress and the courts.

We understand why he may have been reluctant to address the nation, since his contempt for regulation is a significant cause of the current mess. But he could have offered a great deal more than an eerily dispassionate primer on the credit markets in which he took no responsibility at all for the financial debacle.

He promised to protect taxpayers with his proposed bailout, but he did not explain how he would do that other than a superficial assurance that in sweeping up troubled assets, government would buy low and sell high. And he warned that "our entire economy is in danger" unless Congress passes his bailout plan immediately.

In the end, Mr. Bush's appearance was just another reminder of something that has been worrying us throughout this crisis: the absence of any real national leadership, including on the campaign trail.

Given Mr. Bush's shockingly weak performance, the only ones who could provide that are the two men battling to succeed him. So far, neither John McCain nor Barack Obama is offering that leadership.

What makes it especially frustrating is that this crisis should provide each man a chance to explain his economic policies and offer a concrete solution to the current crisis.

Mr. McCain is doing distinctly worse than Mr. Obama. First, he claimed that the economy was strong, ignoring the deep distress of the hundreds of thousands of Americans who have already lost their homes. Then he called for a 9/11-style commission to study the causes of the crisis, as if there were a mystery to be solved. Over the last few days he has become a born-again populist, a stance entirely at odds with the career, as he often says, started as "a foot soldier in the Reagan revolution."

After daily pivoting, Mr. McCain now says that the bailout being debated in Congress has to protect taxpayers, that all the money has to be spent in public and that a bipartisan board should "provide oversight." But he offered not the slightest clue about how he would ensure that taxpayers would ever "recover" the bailout money.

Mr. McCain proposed capping executives' pay at firms that get bailout money, a nicely punitive idea but one that does nothing to mitigate the crisis. And that is about as far as his new populism went.

What is most important is that Mr. McCain hasn't said a word about strengthening regulation or budged one inch from his insistence on maintaining Mr. Bush's tax cuts for the wealthy. That trickle-down notion has done nothing to improve the lives of most Americans and, even without a $700 billion bailout, saddled generations to come with crippling deficits.

Mr. Obama has been clearer on the magnitude and causes of the financial crisis. He has long called for robust regulation of the financial industry, and he said early on that a bailout must protect taxpayers. Mr. Obama also recognizes that the wealthy must pay more taxes or this country will never dig out of its deep financial hole. But as he does too often, Mr. Obama walked up to the edge of offering full prescriptions and stopped there.

We don't know if Mr. McCain or Mr. Obama will do any good back in Washington. But Mr. McCain's idea of postponing the Friday night debate was another wild gesture from a candidate entirely too prone to them. The nation needs to hear Mr. Obama and Mr. McCain debate this crisis and demonstrate who is ready to lead.

For well over a week, NDN has been offering its thoughts on the causes, effects, and proposals in the financial meltdown. Yesterday, Simon Rosenberg and Dr. Robert Shapiro released an essay encouraging the federal government to keep people in their homes and stabilize the housing sector. U.S. Sen. Barack Obama has been doing the same, meeting with top economists, outlining his principles, and working to ensure that this financial bailout actually helps everyday Americans.

Meanwhile, U.S. Sen. John McCain, has, in the words of George Will, "substituted vehemence for coherence," for the last week, calling for the head of SEC Chairman Chris Cox, demanding regulation he used to crusade against, and otherwise misunderstanding the complex levers that drive America’s financial sector.

Today, following an 8:30 am call from Obama and some very, very bad public polling, McCain snapped, and decided that the financial crisis was in fact worthy of a significant reaction. McCain’s chosen reaction, leaving the campaign trail to return to the scene of the deregulation and try his hand at crafting legislation that accomplishes the opposite of what he has stood for his entire political career, is the easy way out. It is designed to do one thing: place Obama in an awkward position. One must not confuse this – campaign tactics – for what McCain wants people to think it is – leadership.

So, instead of campaign trail theatrics and huff-and-puff returns to Washington, let’s have a debate on Friday. But, instead of talking about foreign policy, let’s talk about the financial meltdown and the future of the American economy. An unprecedented number of Americans think the country is headed in the wrong direction, and they are looking for those who would lead to demonstrate that they have a plan to put the nation back on track. These two Senators are running for President amidst the greatest economic turmoil in a very long time. The American people deserve a debate.

UPDATE: From Obama, courtesy of Politico.com's Ben Smith:

It’s my belief that this is exactly the time the American people need to hear from the person who in approximately 40 days will be responsible with dealing with this mess.
...

Presidents are going to have to deal with more than one thing at a time. It's not necessary for us to think that we can do only one thing, and suspend everything else.

In its lead editorial today, the New York Times asks a simple but super important question - why should we trust this Administration to understand what is happening now to our financial markets, offer the right solution and then manage the coming difficult process ahead? 

With two days of Senate and House testimony ahead, our financial future takes center stage in Congress, as it appropriate given what the American people are being asked to do, and who is doing the asking.

As I wrote over the weekend, I, like many, worry about what this means for the agenda of the next President.  Through the twin disasters of Iraq and the financial bailout, we will have little money now to tackle other urgent national priorities - modernizing our schools, improving the skills of our workers, investing in clean and traditional infrastructure, helping move our nation to a low-carbon future, radically improving our health care system, managing the coming retirement of the Baby Boomers, protecting our homeland, keeping people in their homes? Will cleaning up the terrible messes of this disappointing era overwhelm the need to build our 21st century economy and sap our collective capacity to tackle the necessary and tough challenges ahead?

Congress must stand firm and ask the tough questions.  The most important being will this investment of what will be more than $1 trillion actually stop the meltdown?  Rob and I offered our thoughts on this last Wednesday, and argue that without an effort to keep people in their homes, any moves by the the government are unlikely to do what we need them to do. 

It is more important now for Congress to do the right thing than the expedient thing.

Our friend Rob Dugger penned a powerful op-ed in the Washington Post today, A Prescription for Recovery.  It offers these five principles to help guide our next steps in putting our financial system back on track: 

· Put individual taxpayers first. The program needs to focus on keeping taxpayers in their homes, strengthening their local economies and protecting their savings. It has to help Americans broadly, not just a few, and certainly not the managers who got us into this mess.

· Minimize taxpayer costs over the long term. Short-term thinking created this crisis. Only long-term efforts will end it. The S&L crisis was limited to the financial sector. It was best addressed on an aggressive basis, bank by bank. This meant that least-cost resolutions were the way to go and that the RTC should buy and sell assets quickly, which it did. But the current situation is systemic. It involves our entire economy. This means the revitalization program should buy distressed assets early and plan to hold them for a long time. The goal is to make the economic adjustment as shallow as possible, to limit the injury to families, jobs, homes and savings.

· Avoid creating an interim program. This program must not be like the S&L "rescues" of the mid-1980s, which merely enabled the problems to grow. The program needs to have the capacity, flexibility and scope to address the vast size of the current crisis. Congress should put no dollar or time limit on our national commitment. Yes, markets will want dollar figures. If numbers must be given, let them be in statements about the program -- and let them be big. Do not shy away from saying that the United States is prepared to commit a trillion dollars over the next 10 years to halt this meltdown here and now.

· Remember global investors, whose confidence we must regain. This crisis is an economic heart attack, but not a fatal one. We must assure global investors that we are fully prepared to cover American losses. No one suggests that this will be easy. The budget choices being forced on us will be profoundly difficult. But we have the strongest democracy and the most durable legal and financial systems in the world. We have the capacity to absorb losses and the ability to reshape our economy. Foreign investors need evidence that we are committed to the changes necessary for recovery. When they see that, they will buy our private assets again.

· Do not hesitate. Bill Seidman's greatest lesson was action. It is far better to deal with a few assets, even without knowing quite what to do, than to do nothing while trying to work out the details. Whoever is in charge of the revitalization program must not hesitate to buy the assets that institutions offer -- these will be what is burdening the institutions and clogging our credit system the most. There are many strategies for buying assets and infusing capital that can protect the program from paying too much and ensure that taxpayers benefit from price increases as recovery occurs. The key is to get the assets in-house quickly and learn how to manage them effectively.

Senator Obama released a detailed statement of principles that will be guiding his involvement i n the coming efforts to stop a full blown financial meltdown in the US.  It includes something NDN feels very strongly about - a plan to keep people in their homes. 

The statement: 

"The era of greed and irresponsibility on Wall Street and in Washington has led to a financial crisis as profound as any we have faced since the Great Depression. 

"But regardless of how we got here, the circumstances we face require decisive action because the jobs, savings, and economic security of millions of Americans are now at risk.

"We must work quickly in a bipartisan fashion to resolve this crisis and restore our financial sector so capital is flowing again and we can avert an even broader economic catastrophe. We also should recognize that economic recovery requires that we act, not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America. 

"But thus far, the Administration has only offered a concept with a staggering price tag, not a plan.

"Even if the Treasury recovers some or most of its investment over time, this initial outlay of up to $700 billion is sobering. And in return for their support, the American people must be assured that the deal reflects some basic principles. 

No blank check. If we grant the Treasury broad authority to address the immediate crisis, we must insist on independent accountability and oversight. Given the breach of trust we have seen and the magnitude of the taxpayer money involved, there can be no blank check.

Rescue requires mutual responsibility. As taxpayers are asked to take extraordinary steps to protect our financial system, it is only appropriate to expect those institutions that benefit to help protect American homeowners and the American economy. We cannot underwrite continued irresponsibility, where CEOs cash in and our regulators look the other way. We cannot abet and reward the unconscionable practices that triggered this crisis. We have to end them.

Taxpayers should be protected. This should not be a handout to Wall Street. It should be structured in a way that maximizes the ability of taxpayers to recoup their investment. Going forward, we need to make sure that the institutions that benefit from financial insurance also bear the cost of that insurance.

Help homeowners stay in their homes. This crisis started with homeowners and they bear the brunt of the nearly unprecedented collapse in housing prices. We cannot have a plan for Wall Street banks that does not help homeowners stay in their homes and help distressed communities.

A global response. As I said on Friday, this is a global financial crisis and it requires a global solution. The United States must lead, but we must also insist that other nations, who have a huge stake in the outcome, join us in helping to secure the financial markets.

Main Street, not just Wall Street. The American people need to know that we feel as great a sense of urgency about the emergency on Main Street as we do the emergency on Wall Street. That is why I call on Senator McCain, President Bush, Republicans and Democrats to join me in supporting an emergency economic plan for working families - a plan that would help folks cope with rising gas and food prices, save one million jobs through rebuilding our schools and roads, help states and cities avoid painful budget cuts and tax increases, help homeowners stay in their homes, and provide retooling assistance to help ensure that the fuel-efficient cars of the future are built in America.

Build a regulatory structure for the 21st Century. While there is not time in a week to remake our regulatory structure to prevent abuses in the future, we should commit ourselves to the kind of reforms I have been advocating for several years. We need new rules of the road for the 21st Century economy, together with the means and willingness to enforce them.

"The bottom line is that we must change the economic policies that led us down this dangerous path in the first place. For the last eight years, we've had an "on your own-anything goes" philosophy in Washington and on Wall Street that lavished tax cuts on the wealthy and big corporations; that viewed even common-sense regulation and oversight as unwise and unnecessary; and that shredded consumer protections and loosened the rules of the road. Ordinary Americans are now paying the price. The events of this week have rendered a final verdict on that failed philosophy, and it is a philosophy I will end as President of the United States," said Senator Barack Obama.