The right showed once again that they have no allegiance whatsoever to the free market when House Republicans pushed through a bill that would prohibit the Federal Housing Authority from insuring the mortgage of anyone who had "strategically defaulted" on an earlier mortgage. The intention was to punish people who had taken advantage of this option and therefore make it less likely that others would go this route in the future.
A strategic default is when a person stops paying a mortgage even when they can still afford it, and instead turns the house back to the lender. This can be a desirable move for borrowers if the price of the house has fallen below the value of the home due to the collapse of the housing bubble.
In many states a mortgage is a non-recourse loan. This means that under the terms of the contract, the return of the home ends any commitment to the lender. Even in states where the loan is a recourse loan, it is unusual for lenders to pursue actions against borrowers after a foreclosure, even if they have not recovered the full amount of the mortgage by re-selling the house.
For these reasons, a strategic default can often be a good option for homeowners. In fact, strategic default is a standard business practice. Businesses often default on a mortgage and turn the property back to the lender when they decide that this is the more profitable route to follow. For example, Morgan Stanley recently went this route with five office buildings in San Francisco whose value was considerably less than the outstanding mortgage.
But Republicans in Congress aren't interested in leaving things to the market. They were concerned that too many homeowners were acting in their own best interest and thereby hurting the banks. So they decided to have Big Government step in and create an additional sanction for homeowners who strategically default.
The impact of this bill, even if it goes into law, is likely to be primarily symbolic. There is no easy way for the FHA to determine if a default was strategic. However, this does show clearly the Republicans contempt for the free market and the sanctity of contract: principles that many of them purport to hold dear.
After all, banks presumably understood the risk of default when they issued the mortgage. They understood that house prices could drop giving homeowners an incentive to default. The banks should have incorporated this risk into the interest rate they charged on the loan.
Now that the risk is turning many mortgages into bad bets for the banks, the Republicans want to re-write the rules to the benefit of the banks. Are we to believe that the boys and girls at Citigroup and J.P. Morgan didn't understand the terms of the mortgages they were issuing? Do the CEOs of these huge banks need a government bureaucrat to hold their hands and explain the terms of these mortgages to them so that the banks understand the risks they face when they issue a mortgage?
This is not the only case where the government is actively interfering in the market to help big corporations. Many of us were struck to discover that BP faces a liability cap of $75 million from its oil spill. This means that the government has given BP the right to do tens of billions of damage to people's property, livelihood, and lives and walk away with a tab of just $75 million. In what world is this a "free market"?
There is a similar liability cap for the nuclear industry. The Price-Anderson Act limits the liability from an accident to $12 billion. This means that people will not be compensated for any damage that a nuclear accident causes in excess of this amount, unless they get the taxpayers to foot the bill.
Again, where is the free market here? For those who think that nuclear power is a safe and clean form of energy, why not let the industry just buy insurance on the market like any other industry? If the market won't provide insurance at an affordable rate, is there some reason that the government should step in and make an otherwise unprofitable industry commercially viable.
There are endless more examples of the government actively intervening in markets on the side of the rich and powerful. This is not a surprise to those who follow politics. The only surprising part is that somehow those who routinely support such interventions can get labeled as advocates of the "free market."
This is not just their own labeling. Progressives routinely denounce their right-wing opponents as "free market fundamentalists."
It is absolutely baffling why progressives would help the right clothe policies whose only unifying theme is that they serve the interest of the wealthy as a principled commitment to the market. A principled commitment to the market is a view that has appeal to a broad segment of the population. The real priority of the right -- a commitment to serve the interests of the rich and powerful -- will only appeal to the rich and powerful.
Progressives have to stop doing propaganda service for the right. There are no free market fundamentalists here; everyone recognizes the need for a big role for government in the economy. The debate is over whether we want the government to serve the needs of the bulk of the population or just the purposes of the rich and powerful. Progressives must stop helping the right hide its real agenda.
I totally agree.
Other myths:
a. European countries are "socialist". No, they' re not. They are capitalist economies and their public sectors are now struggling to pay the benefits they promised and maintained for a while. France just pushed the "Minimum Retirement Age" to 62, requiring AT LEAST 40 years of work to get a government pension.
b. More regulations are good for the small people. Not true in many cases. Large corporations can easily maintain departments to handle regulatory work. Small businesses cannot do that.
c. Tax the rich. Well yes, but what happens when the rich take their wealth elsewhere? Very easy to do. Why no try better "give incentives to everyone, including the rich, to invest in their local economies".
d. "Socialism". There is no such thing, never was. The world now has mostly capitalist countries and 2-3 communist countries.
e. "Capitalism". No such thing. The U.S. happened to avoid destruction in WWII and was the only player for decades. Game over, now we have to actually work hard and save... :-)
The "reserve currency" status won't last for ever.
f. The "Euro dream". I'm a European. This is nonsense. Forcing everyone to fit into the German standards without German resources... what a flop.
In economics (at least the sane version most of us learned in school and in practise), we learned about "mixed economies," where there are some industries and markets that are government owned or heavily regulated because they are too important or dangerous to leave to a for-profit entity. The rest have fewer rules to follow for a variety of reasons I can't list in 250 words. That is what has been proven to work best (read a history book or three).
If we look at history we see periods of good and bad, we just need to investigate each sides argument based on the reality of what happens.
I ABSOLUTELY agree. But I have lived in three countries and it never happened. It's not going to happen. Though I noticed that America is the most fair (despite the constant and daily criticism - in Europe we hide issues under the rug) - however, if the public sector increases too much, you'll see the "equality European version" which is public sector employee gets 200, you get 50 and shut up otherwise...".
The government is supposed to be there to protect our rights and safety, not to micro-manage our lives.
Kudoz to America for sometimes going against large corporations to protect individual rights - those things almost never happen in Europe.
Not kudoz to America for following a "European Corporatism" model ("Airbus" is the most innocent case) and bailing out corporations with taxpayers' money. Shame on them, they have bad upbringing - shame on their parents.
How many Leftists would want their personal property confiscated by the government? (Personally I don't care because I have no real estate property in the U.S., but under the extreme leftists, redistribution of wealth requires that all property be government property - and no elections, no free exit from the country, etc etc).
"Free Market" means "Whoever has the most money wins, and damn the little people who suffer for our wealth". If you believe progressives invented it, then you haven't been paying attention the last 60 years
We need a market that's intensely regulated, with a pair of handcuffs hanging over every decision made at companies big enough to affect anything beyond themselves in the big picture.
Simply daft. This is one of the worst economic pieces I've ever read here.
You don't remember W. . .?
That's what the ladies tell me.
"Who do you think passed all those bailout bills for banks and big business?"
Ironically, the Wall Street Journal mocks you:
WASHINGTON -- "Upending the government's relationship with the financial sector, the Bush administration outlined a plan Tuesday to prop up banks by injecting $250 billion into U.S. financial institutions, including nine of the nation's largest banks, and to guarantee new debt issues and deposit accounts used by businesses."
"CEOs were briefed Monday on the government's plan, said they don't expect that the government's new role as a major shareholder will subject them to additional regulatory restrictions."
"Treasury essentially forced nine major U.S. banks to agree to take $125 billion from the federal government. "
http://online.wsj.com/article/SB122398468353632299.html
"Who got most of the money from Fannie and Freddie? Democrats "
I'll let Bloomberg Business Week enlighten you:
"Fresh off the false and politicized attack on Fannie Mae and Freddie Mac, today we’re hearing the know-nothings blame the subprime crisis on the Community Reinvestment Act — a 30-year-old law that was actually weakened by the Bush administration just as the worst lending wave began. This is even more ridiculous than blaming Freddie and Fannie."
http://www.businessweek.com/investing/insights/blog/archives/2008/09/community_reinvestment_act_had_nothing_to_do_with_subprime_crisis.html
Your sources for information haven't served you well.-LOL!
If you home is worth 50% less than you mortgage your interest rates has effectively doubled. Your 5.25% loan is now 10.50%, add that housing values will not likely return to par for five to ten years and property taxes and insurance costs are not likely to be reduced and realize that you home has become a money pit. Now, home ownership has an emotional component as well and that will be a part of any decision, but at some point the dollars and cents must make sense. 10.5% interest for ten years to reach par makes no sense.
Banks facilitate loans, enabling people to purchase things at current market value. The market was overpriced, lots of competition, lots of speculation, signing things like ARM's, all became too exotic, people buying up things called 'mortgage-backed securites', and finally the wheels fell off, with the final result that you had lots n lots of people moving OUT of their homes, foreclosure. And, unless people, and banks, and real estaters, and speculators generally agree to change their operations, it'll happen again. And government will be asked to fix the broken toy again, at taxpayer expense. I say let the housing market STAY broken, no more bailouts. Kick over the poker table and hand out the gambling citations.
Real conservatives, the frugal, traditional, careful kind we've been conditioned to believe they are, have always morphed into the war-mongering, fear-mongering, jingoist, racist, reactionary plutocrat pawns, fascists and chickenhawks that pollute our environment and berserk our economy. Conservatives may have decided to stop defending Wall Street to shift the blame for all the recent and ongoing disasters from themselves. But if you were sincere, you would be calling for Bush and Cheney's heads on a plate for causing them.
Why Conservatives Can't Govern
http://www.washingtonmonthly.com/features/2006/0607.wolfe.html
"But Republicans in Congress aren't interested in leaving things to the market. They were concerned that too many homeowners were acting in their own best interest and thereby hurting the banks. So they decided to have Big Government step in and create an additional sanction for homeowners who strategically default."
It might be an intervention in the free market if the federal was not already up to their neck in the mortgage market through Fannie & Freddie, so about 50% of the losses from strategic defaults are flowing right to the federal government. But the plain facts, which Dean knows, are that the federal government intervened in the housing market years ago, and helped create Dean's favorite housing bubble.
While I also believe they were mismanaged and should be completely reformed (into one organization which holds all owner occupied mortgages), you must remember it was Fannie and Freddie that saved us from another Great Depression. They have been the only institution buying mortgages from banks since 2007. Without them, housing values would have dropped another 50%, plunging America into an economic spiral.
1. The Community Reinvestment Act of 1977 was irrelevant to the subprime boom, which was overwhelmingly driven by loan originators not subject to the Act.
2. The housing bubble reached its point of maximum inflation in the middle years of the naughties:
(see Schiller graph in reference at end.)
3. During those same years, Fannie and Freddie were sidelined by Congressional pressure, and saw a sharp drop in their share of securitization:
(see inside mortgage finance graph from 2009 in ref)
while securitization by private players surged:
(see inside mortgage finance graph from 2009 in ref)
Refs and more supporting material here:
http://krugman.blogs.nytimes.com/2010/06/03/things-everyone-in-chicago-knows/
This is so last year's news. Get current would ya.
lff
I think you are trying to be clever with the title of this piece but it doesn't make a lot of sense. Market fundamentalism is a pretty good label for what it is trying to describe. Some people might think that "fundamentalism is a good thing" but a lot of people don't. It is true that the word market fundamentalism was invented by...I think, George Soros... but the concept was invented by your fellow economists like Milton Friedman and Friedrich von Hayek.
What would YOU call neoliberalism in a way that Americans can understand what you mean?
This is as close as you can get