Weekly Audit: Stimulus Stagnation Economy NewsLadder

by Zach Carter, Media Consortium MediaWire blogger

Despite a lofty launch last week, the good ship Bipartisan is sunk, at least so far as the economic stimulus is concerned. President Barack Obama and House Democrats bent over backwards to appease the GOP by including several tax breaks and excluding a major anti-foreclosure measure from the package, but when it came time to vote, zero House Republican backed the bill. Lawmakers who actually care about the fate of the U.S. economy are furious. Every day spent haggling with obstinate Republicans means heavier economic damage. What's more, many of the tax breaks the GOP insisted on are simply terrible policies, whatever the economic climate.

"Not surprisingly, some Democrats who did deal with the GOP as if they were reasonable want to reverse the concessions they gave up," Steven Benen writes for The Washington Monthly. Even some conservative economists want to strip out the Republican provisions. On this week's Stimulus Plan NewsLadder, many reporters and bloggers respond to Martin Feldstein's newfound opposition to the stimulus package, as revealed in a Washington Post op-ed. Feldstein, who was chief economic adviser to President Ronald Reagan, initially come out in support of the package but recently reversed his opinion, but on suprising grounds. While progressives have noted that some of Feldstein's criticisms of the House bill are off-base, they have also emphasized that his take on several stimulus plan tax cuts, actually come from the ideological left. As blogger Dylan Matthews put it in a guest blog for Ezra Klein at The American Prospect: "You know when your stimulus package is too cautious? When Marty Feldstein is attacking it from the left."

One of Feldstein and the left's major problems with the package: the corporate "net operating loss carryback" (NOL) giveaway. The NOL carryback works like this: companies who lost money in 2008 will get an immediate refund for taxes paid on previous, profitable years. Right now, the carryback limit is two years. The stimulus bill would change the law to refund companies every penny they paid in taxes for the past five years, so long as the company lost more than that five-year sum in 2008.

Tax cuts can be economically helpful when they create incentives for people to act in socially beneficial ways. For example, offering a company a deduction for starting a windfarm creates jobs and establishes an environmentally friendly power plant. Giving away billions of dollars to companies simply because they lost money, by contrast, encourages nothing. What's more, many businesses lost money in 2008 because they were in bloated sectors that needed to get smaller. The U.S. has too many banks and too many homebuilders—that's one of the reasons why so many banks and homebuilders are struggling right now. A lump-sum payment will not fix the underlying problem.

Not all of Feldstein's recommendations are good ideas-- Josh Marshall of Talking Points Memo offers a particularly good rejection of his push for increased military spending—but Feldstein's argument nevertheless makes the Republican leadership look like a total farce. "His critique is nothing like the Republican claptrap we've been hearing over recent days," Marshall writes. "In fact, in some respects it's like stuff I've been hearing from Democrats."

House Democratic concessions on the stimulus involved more than new tax cuts—they also excluded several important provisions to keep the GOP happy. Republican leaders successfully lobbied Obama to bar mortgage bankruptcy reform from the bill, blocking the most important legal step necessary to reduce foreclosures. It is the second time Obama has urged Democrats to abandon the bankruptcy rule change to garner Republican support for a major bill—the first was the Wall Street bailout bill that passed in October. Even if the bankruptcy legislation passes at some point in the future, many borrowers in trouble now will lose their homes before the law changes.

"That stance has piqued some Democrats, who are beginning to wonder if the push for bipartisan agreement is worth the cost of waiting," Mike Lillis writes for The Colorado Independent. "For each day that Congress dallies, these lawmakers say, thousands of Americans lose their homes to foreclosure."

According to the Center for Responsible Lending, we will see 6,000 foreclosures every day this year on subprime mortgages alone.

Let's conceptualize how the bill could change the mortgage landscape. Imagine that you get laid off and start working a job with lower pay, rendering your mortgage payments unaffordable. In many circumstances, your bank would want to modify your loan so that you owe them less money, because the alternative—foreclosure—creates an even bigger loss for the bank. The trouble is, banks frequently do not have the ability to alter loans, because they sell them to a third party investment bank. The investment bank packages the loan into a security with a hundred or so other mortgages and then sells it to dozens of investors. Now, hundreds of signatures are required to modify your mortgage—and not all of the investors have your interests at heart. Some would rather see you default on your mortgage, because they know the decreased value of the security will hurt their competitors more than it will hurt them.

But if bankruptcy courts could compel loan modifications, all of this investor warfare would be avoided. You file for bankruptcy and the court will "cram down" the amount you owe on your mortgage and banks or investors simply eat the difference as a loss. No taxpayer-funded bailout necessary.

Obama's economic work will not stop with the stimulus legislation. Major regulatory reform is needed on a variety of financial fronts, not the least of which is preventing borrowers from getting stuck with predatory mortgages in the first place. As Stephanie Mencimer of Mother Jones notes, the Federal Reserve appears to be softening its long-time anti-regulatory stance. The steps are small, but significant. While the Fed's new rules barring some abusive credit card billing practices didn't go far enough, they mark the first time the Fed has acknowledged that common lender practices are straightforwardly unfair. The central bank has even hired a consumer activist as a policy adviser.

For all its faults, however, Obama's stimulus gets several important policies right. In a piece for The Nation, Robert Pollin notes the dramatic new shift in tone regarding the compatibility of environmental sustainability and economic justice. After decades of debate that pitted the plight of workers against saving the environment, people are finally waking up to the idea that we might create good paying jobs to fight global warming.

For now, the recession continues to grind on, with strange and depressing surprises appearing everywhere—even grocery store shelves. Jim Hightower unveils a new trend among producers to shrink product sizes while maintaining their prices, effectively raising the cost to consumers. The shrink-ray tactic has been deployed on toilet paper, cereal, peanut butter and who knows what else. Thanks to tricky marketing and packaging, you might not even realize when you've been ripped off.

This post features links to the best independent, progressive reporting about the economy. Visit StimulusPlan.NewsLadder.net and Economy.NewsLadder.net for complete lists of articles on the economy, or follow us on Twitter.

And for the best progressive reporting on critical health and immigration issues, check out Healthcare.NewsLadder.net and Immigration.NewsLadder.net.

This is a project of The Media Consortium, a network of 50 leading independent media outlets, and was created by NewsLadder.

Comments

[dcrinaz]

More than an economic stimulus is needed to end the recession. Bankruptcy law on primary home mortgages needs to be reformed, or the Stimulus will not have the desired effect.

Judges should be allowed to change the principal, interest and terms on primary home mortgages. Without this, lenders will continue foreclosures because they will not be compelled to do otherwise. Bankruptcy reform this month will provide the "otherwise­."

Lenders purposely exacerbated dropping home values by forcing foreclosures instead of renegotiating loans. Exactly because homeowners cannot declare bankruptcy on primary home mortgages, mortgage lenders forced homeowners to either pay up (which many cannot do because of the recession) or leave.

Mortgage lenders would rather endanger their principal investment by foreclosing on a home, thus losing monthly income along with hundreds of thousands of dollars of the home's value than let the homeowner stay in the home, make payments and keep the house off the market until prices stabilized. The lenders' choice to foreclosure on loans they could have renegotiated not only devastated families, but also destabilized the housing market, lowered property values and decreased public revenues. This loss in property values resulted in the loss of personal wealth which is at the core of this recession all Americans are facing.

So, doing the Stimulus without reforming bankruptcy law would be like tranfusing fresh blood into a patient, while not stopping his bleeding elsewhere. Bankruptcy reform will stop the loss of personal wealth caused by dropping home prices driven by foreclosures.

[Binea]

Don't bail the banks out. Let housing drop to hmm 20- 50 K a house.Give American tax paying "families" a check for 100 K with the stipulation that they must spend it within a year or else give it back.Make another stipulation that if they have a Job and quit it because they suddenly have some money,it will be taken away.
This idea is a far better .Americans will have some control over their lives, dignity,and the economy will recover .
Government idiots keep gambling, just give us the money directly,at least it will give us back our DIGNITY and restore HOPE. Think of that Homeless Old lady pleading with Obama for HELP yesterday during his town Hall meeting.Th­at woman could take the 100 K buy a nice trailor for 20-40K and have some money left to spend on other necessities, What is so wrong with trusting us,the American people to get this economy going again ?
They even ADMIT they don't know if their plan will work.They seem bent on putting us further in debt ,weaking the dollar. At least give us a chance to survive the stupidity. Whoopi do... they will extend unemployment,and give us medical,but that will run out long before the economy gets better..th­en what ? They just want us to trust them to make the same mistakes Bush and others before him made,to trust the untrustworthy ? C'MON. Eigther listen to true conservatives like Ron Paul ,or try it this way.

[Aaror]

Mr. Carter,
Very well written, and I agree with most of what you said, but I have a small quibble with this section:
"a security with a hundred or so other mortgages and then sells it to dozens of investors. Now, hundreds of signatures are required to modify your mortgage—and not all of the investors have your interests at heart. Some would rather see you default on your mortgage, because they know the decreased value of the security will hurt their competitors more than it will hurt them. "
It isn't that the default will harm a competitor more than the investor, it is that the investor will not lose money if there is a default, but will if the terms are modified.
The "tranches," of the mortgage securites were set up so that there was a priority to investors of any payments received. The idea was that in a forclosure, the folks in the top tranches would get paid first, so their risk was low. A forclosure doesn't reduce their profit, because they get the full value of the principle, plus accrued interest, in a lump sum as soon as the foreclosed house sells, even if it is sold for 50% of the original price. However, changing the repayment rate would lower the interest they get on their investment.
A specialist could explain this better, but basically they are being greedy and forcing people onto the streets for a few percentage points of return on investment.