What Can Still Tank the Economy? The Bush Administration Hearing No Evil, Seeing No Evil

This is a campaign issue. The economy is not out of the woods yet, even though stock prices are doing better, companies are making profits, and unemployment hasn't soared. Thank the lower dollar and government fiscal and especially Federal Reserve policies.

But, in fact, credit is still tight in America and Europe, Fannie Mae just lost a bundle on mortgages, and, most important, house prices are still falling. The last is the key. The Case-Shiller index of house prices keeps tumbling. That means the bad mortgage debt will climb some more, and there will be more serious losses at the financial institutions. And on.

Government has to drop the other shoe. The nation needs a partial rescue of the mortgage market. It is costly and not easy to save only those who deserve it. But if the bleeding in housing is not slowed, much is at stake.

So on Tuesday, the Treasury Secretary, Henry Paulson, proudly told America the Bush administration will veto the Democratic bill led by Barney Frank bill to put a floor under the mortgage collapse. Did Paulson offer anything substantial in its place? Of course not. Hear no evil, see no evil, do no good.

There is a disturbing murmur among some mainstream economists and policymakers that the crisis isn't that bad after all. I hear it in private meetings. They readily forget how much government has done already, and where we would be if it had not.

The Bush administration loves that word 'voluntary.' They want the industry to volunteer to take some losses to clean up the mess. They call it HopeNow. And then the financial industry will volunteer to regulate itself and promise wholeheartedly not to make so many bad loans again. Right.

We should be hearing more about this failure to act from the presidential candidates. They should know and state that we are still on the brink of serious economic calamity. If you think workers are suffering, just wait. The next president has to know how to move quickly and correctly. There are always risks to such action. The Barney Frank plan, for example, is not perfect. But the Bush administration should be talking about improving the plan, not resorting to ideological nonsense about minimal government interference.

It reminds me of how their forefathers, including Milton Friedman and his disciples, like Tom Sargent, the famed rational expectationist now at NYU, insisted that the 1982 recession would be mild. Unemployment hit 11 percent. For non-whites it hit 18 percent. Wages collapsed. It was the worst since the Depression.

There is a time for government to step back. But this is the time for government to step up.

Comments

[Rocket80]

It was government involvement that caused this problem and you think MORE government involvement will solve it? Sheesh, let the market correct itself - we wouldn't have this huge bubbles if the Fed didn't constantly inflate our currency. Secondly, why should MY tax dollars go towards helping people too stupid to help themselves? If you took out a mortage you can't afford, too bad, deal with it. If you are a lending company and gave out mortgages you can't afford, too bad, deal with it!

Government spending MY tax dollars on idiots on both ends of the deal is not something I'm for, call me crazy.

[Robert59]

Jeff,

Why is Fannie Mae losing money? Because the administration and Wall Street have pushed it to lower their standards, to accept more risk. Do subprime loans, increase the loan ceilings, bundle the notes, blah blah blah and the end result has been a disaster.

Too bad the heads of Fannie Mae and Freddie Mac didn't fall on their swords and say NO; we're fine the way we are. We don't need to be another lemming.

What Wall Street is really trying to do is to pawn off all their crappy loans to Fannie Mae so the taxpayer ends up eating the bill.

[Robert59]

I'm not convinced Frank's plan is going to make things better. The trend I detect in all these programs is a taxpayer bailout of Wall Street. The Fed has loaned them half a trillion or more dollars. Frank's bill will keep the price of houses artificially high. The truth is houses became grossly overvalued, not just here but all over the world. Their ascent certainly didn't correlate to wages.

And I have to agree all these band aids won't fix the systemic problems; if anything they will make it worse adding hundreds of billions or even trillions to the national debt making our dollar weaker meaning we will pay for it at the gas pump.

Even worse the more stupid debt we incur the fewer options we have available to us. Make the national debt 11 trillion instead of the 9.7 it is now and then go to Congress and suggest we spend another trillion or two to become energy independent and boost the economy. They'll laugh because then our dollar will be really worthless.

If the Fed wants to bail out Wall Street let them do it on their dime, not mine. Ditto for the housing industry and even the homeowner. What I'd prefer is a huge liquidation sale where these houses sell for what they would at an auction and the mortgage holder absorbs the loss.

This infusion of capital has only given banks seed corn to issue consumers loans at high interest, welfare for the rich.

[WIpatriot]

The best solution is to let them crash and burn. We've been saying that from Day 1, but since they all have their hands in each other's pockets, that's not how it's going to shake out.

You WILL be holding that flaming bag, sir!

[JoeBlough]

Housing prices are not really falling. They are simply returning to their proper value. Houseing prices double, but the value doesn't. All these MacMansions were over priced and the suckers lined up to buy them. Now prices are returning to true value. That is, unless the government gets involved and screws everything up again.

[Sundialsvc4]

I believe that the true causes of our economic issues are far more systemic than we might care to admit; there are no "quick" fixes.

Think about it: we've got a nation of 304,027,886 people (at this particular instant...) which positions itself as "a consumer nation." A nation that depends on imports for everything, shipping even its underwear tens of thousands of miles. A nation that had to close a domestic shoe-factory because the support infrastructure needed to keep it open no longer existed here.

This is a nation that, back in the 1970's, negotiated an agreement by which Oil would be bought and sold only in dollars, and today this nation "borrows from itself" more than $1 million a MINUTE. What part of "worthless paper" is hard to understand?

Finally, this nation is belligerent ... engaging in war-crimes flagrantly. An increasingly-hostile and dangerous rogue, bristling with nukes and anxious to use them. How do you rein-in such a nation without being vaporized first?

In the 1940's we had Rosie the Riveter and we had Uncle Sam. Today, we've got "the Inverse Rumpelstiltskin Effect" spinning our gold into straw.

Here's our problem. And there will be no "magic knob" to twist to fix it.

[JoeBlough]

I agree. Oil is valued/sold in terms of dollars. As the value of the dollar decreases, it takes more of them to buy a tank of gas. People don't seem to understand this. The people's government is doing things to purposefully decrease the value of a dollar, like dropping the interest rate. Until people vote back in grown-ups that care, instead of crafty, greedy simpletons, you will only get what you deserve.

Think about how you vote.

[joebaggadonuts]

I for one would rather have intervention based on a Democratic initiative than one which the Bush bots propose. Almost no matter what it is. Bush and his lack of acumen has brought us to this place, so perhaps the best thing to do is exactly the opposite of what he wants to do if we want to get out of it. We do want to get out of this credit crunch, don't we?

[WIpatriot]

ABSOLUTELY no matter what Bushie's plan is, the answer is NO!

[peterg76]

Despite the mythology, the problem is not lack of intervention by government, but bad intervention. More bad intervention will make things worse.

[bgregs]

True, BAD intervention will make things worse. However, a total lack of intervention will be worse!

[WIpatriot]

How is that possible?

The crime lords go down like dominoes? The MSM falls all over themselves covering it up?
The bushies all lies about it?

You're not READY? When WILL you be ready? The train is leaving the station....

[Rule Of Law]

So we're to keep spending Our Money--you know, the People's money--to prop us these arrogant, rapacious, criminal corporations when they make bad business decisions? If I make a bad decision, I lose--my job, my house, my investments, whatever, and no one bails me out!

I thought the whole idea behind your Ayn Rand, Free Market Capitalism was that business was free to succeed AND free to fail? Or are we just talking yet again about Socialism for the Corporate Aristocracy, and Capitalism for the poor? Unless there is a Real correction, these blood suckers will just keep going back to the same vein.

[joebaggadonuts]

Very nicely put peter.