RSS Feed MenuThis is part three of a three part series. Read part one here, and part two here.
It is not smart to revile and condemn a president who is not only very popular, as Barack Obama is, but who is also as deft at deflecting anger. (Watch for example Obama’s easy outmaneuvering yesterday of John McCain’s comments about cost over-runs on the presidential helicopter fleet.)
Republicans will get nowhere by hurling epithets at President Obama. We need to remember instead that we have an appointment with the voters in November of 2010 and again in November 2012. It’s our job now to build our case in advance of that meeting as to why voters should trust us to manage the economy in future. The best way to build that case is by offering better alternatives than the Democrats can do.
On the stimulus we had a better alternative: the payroll tax holiday. Unfortunately, instead of stressing that simple, powerful and effective idea, we committed ourselves to a grab bag of complicated and difficult to explain tax breaks – our own depressing mirror image of the congressional Democrats’ instinct to use a crisis to pay off their favored constituencies.
Now here is our chance again. On the financial crisis, we should be offering our own narrative of what has gone wrong – and a better plan for recovery.
Larry Lindsey has proposed one powerful idea already.
The government should offer the option of a new mortgage to everyone now holding one, be it from a Government Sponsored Enterprise like Fannie Mae and Freddie Mac, a bank, or a mortgage broker. The principal amount would be the same as the existing mortgage. If the home-owner had two mortgages or a home equity line, they could all be rolled together into one new 30-year fixed rate mortgage. The new mortgages should have a substantially lower interest rate than existing mortgages. I suggest 4 percent, but the rate could be slightly higher without affecting the program.
The new mortgage would have one very significant difference: It would be a full recourse loan. That is, if the borrower fell behind in the payments, the government could use any means necessary to get repaid. That means not only foreclosing on the house (as under current mortgages) but also collecting any remaining unpaid sums after the house was foreclosed on by garnishing the wages, bank accounts, and other assets of the borrower. Think of it as the IRS providing the loan on the same collection terms as it does on taxes, or perhaps using the powers the government now has to collect on student loans.
Other conservatives will have their own alternatives. We should all welcome a healthy party debate over these ideas –but always bearing in mind that it is ideas, not insults, that are most needed today’s emergency.
Chekote // Feb 24, 2009 at 10:26 am
I agree that we need to publicize our payroll tax holiday and 4.5% mortgage plan.
fact based // Feb 24, 2009 at 11:14 am
Boy you guys need to get outside the bubble if unemployment + underemployment (people wrorking part time that want to work full time and people working at mcdonalds that used to work at caterpillar) is over 15% and anyone that put 20% down on a house in the last 5 years is upside down what does this do ? People cant make the payment at even the lower interest rate. So when they fall behind on the loan the government comes in and wipes out all their assets and they go to a homeless shelter…..great idea
debs // Feb 24, 2009 at 11:29 am
Don’t think that a potentially even more punitive mortgage arrangement will garner much support from either politicians or the electorate. Much smarter is the Dean Baker’s idea: A “own to rent” transition plan following the forclosure. The bank’s get stuck with the bill–but that’s their problem. But people get to stay in their dwellings and the economy gets some demand side oomph. Meanwhile, we move away from the fetishizing of homeownership that both the left and right has contributed to over the past 20 years.
fredjberg // Feb 24, 2009 at 12:23 pm
This variation on stimulus-mortgage restructuring/guarantee will probably not work in the long run (i.e., google Peter Schiff). The right needs to take some courage and present a hard medicine approach to fiscal responsibility as was done in Canada in the mid 90’s. Specifically, balanced budgets as put forth by Preston Manning and company. The liberals saw the public consensus for fiscal responsibility and then embraced much of the Reform Party’s economic platform. In this way they were able to produce surpluses and enjoyed a long stay in power.
The problem for the US electorate is denial of their core problem – global financial imbalances brought on by excess US consumption and debt and low savings and wealth creation. (behavior encourage by fiscal policy and previous stimulus programs) China, Japan and others have gone along with the game by producing goods, making profits and then buying US treasury bills.
Strong voices need to make case for fiscal responsibility and balance, the electorate needs to get on board. Otherwise total collapse/insolvency will be the result.
Alternatively, the US may be able to get out of hoc by selling Hawaii and/or Alaska to the highest bidder.
bloodstar // Feb 24, 2009 at 12:45 pm
That idea by Larry Lindsey is one of the worst ideas possible. at this point why don’t you just nationalize housing and call it a day. Or better yet, why don’t you open up a debtors prison. I hesitate to say it, but Debtors prison could be a more palatable option than that claptrap.
do you really want the government enforcing more loans at the point of a gun? Frak that! that’s NOT smaller government.
fact based // Feb 24, 2009 at 4:34 pm
the banks made risky loans or the investors bought securities with subprime loans with the idea that they had a free lunch and these loans would not have a high defaul risk. They took their risks and were wrong. Time for a workout just like corps and folk like donald trump do with their lenders all the time. The banks take down the principal, get equity on any future appreciation and change the payment and amortization schedule. It happens all the time in commercial loans somehow if you do it for the little guy it is anathema. If it takes the threat of a “cramdown” to get the banks off the dime so be it. Bankers make credit analysis, decide what interest rate reflects the risk and make the loans. Sometimes they are wrong and dont get paid back or need to restructure. That’s how banking works. If every loan got paid back they could make loans at a tiny spread over their funding costs, the larger spread reflects the credit risk.
Lindsey’s plan is the “save the bankers” screw the borrowers plan. Pay back the bankers (so they dont have to pay the consequences of their bad decisions in lending) then make the govt the lender that can throw the delinquent borrower penniless and into living in a box on the street.
I guess that is compassionate conservatism (for the bankers)
JJWFromME // Feb 24, 2009 at 6:02 pm
Interesting article in Wired about the mathematician who made the meltdown possible:
http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
This guy, and the other techies, were warning the MBA’s that the formula was not absolutely reliable. But did the MBA’s listen? No, silly. You don’t actually *listen* to the eggheads–I mean qualified experts–unless they tell you something that makes you money. They’re the type that warn you about global warming. Or tell you you need more troops before you invade Iraq, etc. In short, they’re a bummer. Give me a fast-talking, ex-frat boy MBA with a slide deck and a fancy idea any day. That’s where the rubber hits the road here in America. The pencilneck critics can go take a flying leap.
sinz54 // Feb 24, 2009 at 6:27 pm
The GOP has to decide once and for all if it wants to appeal to Main Street (the so-called “Sam’s Club Republicans), or to keep appealing to giant corporations and Wall Street firms. One reason why the payroll tax holiday got nowhere is because it was truly aimed at the middle class of Main Street, whereas Larry Kudlow and the Wall Street Journal kept demanding corporate tax cuts for their Big Business buddies, which after the business fiascos of this past year was truly a political non-starter. The GOP even refused to stipulate that any business that is, or will be, receiving a Federal bailout will be ineligible for these corporate tax cuts. Hence they would be rewarded twice for their incompetence. The center of gravity of Republican economic conservatism has to shift away from Big Business and Wall Street toward small business, the Main Street middle class, and the garage entrepreneurs.
fact based // Feb 24, 2009 at 7:05 pm
The GOP has to decide once and for all if it wants to appeal to Main Street (the so-called “Sam’s Club Republicans), or to keep appealing to giant corporations and Wall Street firms.
yes and the lindsey plan is the bail out the banks and screw the little guy plan. Banks make risky loans and investors buy risky securities, govt pays down the loans to make the banks whole makes loans to the risky credits and then in the interest of “fairness” if the borrower gets unemployed and misses payments he not only loses his house, he gets completely wiped out.
nice, sell that to the sam’s club repubs
mjg345 // Feb 24, 2009 at 8:34 pm
Mr. Frum,
As a moderate democrat/republican/independent guy who read that you were trying to rebuild a republican party that would realistically debate and address today’s economic and social issues without rancor and false ideaologies – you still don’t get it. Maybe if you renamed your website Lost In Space….
economitis // Feb 24, 2009 at 9:22 pm
“Evil comes not so much from bad intention, but from good intention gone too far” MBAs and their models.
Or why do people think they are owed appreciation ina house?
House are consumption, not real capital.
I even rent my shirts.
Cavosie // Feb 25, 2009 at 6:44 am
I don’t dismiss out of hand the possibility of a payroll tax holiday as having a stimulus effect–although most economists seem to think it’s less beneficial than spending. But I do not understand how it can be effective in the face of rising unemployment. Companies aren’t terminating employees because of payroll taxes; they’re terminating employees because there is no demand.
blatherblah // Feb 25, 2009 at 7:12 am
This looks to be a more comprehensive alternative than the one Obama has proposed. I can see 2 difficulties off the top of my head. (1) it rewards everyone with a lower interest rate, even those who are unable to pay. For those people, the lowered interest rate is pretty much irrelevant. (2) the more significant problem lies with the broader enforcement measures. This seems to me to be going way too far, and gives the creditor a secured interest in the debtor’s property. This is a huge bonus for banks and there is no way a 4% interest should be low enough for such an incredible sweeping set of rights bestowed on the banks when one is simply financing a home.
fact based // Feb 25, 2009 at 7:23 am
this is the (i made a poor credit decision but I shouldn’t pay the price) bankers bailout program
sinz54 // Feb 25, 2009 at 8:22 am
Lindsey’s plan is addressing the problem of foreclosures. But there’s a bigger problem out there: Homeowners who have declared bankruptcy and walked away from their homes, after the value of their home declined to the point that the home was worth less than the principal on their mortgage. That was because the prices of these homes had been bid up way too high in a speculative bubble in the first place. It would be wrong to even try to “fix” this. Even *left-wing* economists, like the Center for Economic and Policy Research, agree that a speculative bubble just has to unwind itself naturally until an equilibrium point is reached according to supply and demand.
sinz54 // Feb 25, 2009 at 8:31 am
economitis: Homeowners may not be “owed” appreciation–but remember that homes are so leveraged (mortgages of *at least* 80% of the purchase price) that they cannot tolerate even a moderate amount of depreciation without the homeowner owing more on his mortgage than the home is worth, then filing for bankruptcy and walking away from his home. Appreciation provides the cushion in value that makes that less and less likely as the years go by.
AZT // Feb 25, 2009 at 10:04 am
David:
Good try. However, if you notice as all roads lead to Rome, all the solutions somehow lead to the gov intervention. If you want to be relevant, I suggest the Republicans find a way to incorporate the image of gov into a more palatable form. I am giving this advice in spite of my better judgment but I’ll do it anyways. The current Republican party platform of marginalizing gov and thinking that tax breaks are the solution to all our economic necessities will not resonate with the new generation of incoming voters. I have two teenager kids and have been listening to their talks and observing their behavior for sometime now. I can assure you that these kids are not your “bad gov or bad socialism material.” They are well connected and understand they can’t do it all alone. They love to live happy lives with their cyber-social networks and they will accept any help they can get in any form – you may argue whether this is morally good or bad as much as you want but it is their reality. That does not mean they are not independent or innovative. They are more so probably than my generation. Most youngsters that follow the Republican ideology come from the Republican families, which is a real problem because as we know their numbers are dwindling. Instead of wasting time with blaming who and what policies got us here, come up with fresh and innovative solutions as you also inquire. Don’t be stuck in the rut hole of being loyal to party ideologies. The problem with most think-tank projects that they begin with the ideologies and try to find answers that will fit them. Nevertheless, the sooner the Republican party finds the ways to connect with these incoming voters, better they are off. I cannot see your current rhetoric resonating with them. Good luck with your mission.
sinz54 // Feb 25, 2009 at 10:41 am
AZT: Wait till your teenager kids grow up, graduate from college and have to get real jobs. Right now, they want all the help they can get, because they don’t have to work 9 to 5 to pay for any of it.
Chekote // Feb 25, 2009 at 11:08 am
I just want to point out that many of the MBS securities bought were triple A rated. Much of the problem we are having is the failure of rating agencies to properly assess risk.
Chekote // Feb 25, 2009 at 11:48 am
http://www.time.com/time/nation/article/0,8599,1881581,00.html
Bulldoglover100 // Feb 25, 2009 at 1:48 pm
Obama’s march to socialism…and Bush did what David? How about all the socialism that Bush enacted? Bailing out Wall Street…are we to ignore our party’s actions over the last 8 years???? with FULL Republican vote? or are you just becoming one of those who only want to say how bad the Dems are? when we are so dirty ourselves that we become a joke?