ElectionWatch: Clinton's Rate Foreclosure Freeze Could Cause 'Chaos'
The Democratic presidential race is still going strong and both candidates have latched on to the housing market as a key issue. Both want to bail out mortgage holders, but the news media have given little in-depth attention to concerns about either plan. Warnings that Hillary Clinton‚Äôs proposals could devastate the economy have gone almost unnoticed.
‚ÄúOn the nation‚Äôs credit crunch, she [Clinton] stood by her proposal to declare a 90-day moratorium on mortgage foreclosures and a five-year interest rate freeze on existing, adjustable-rate mortgages, despite withering criticism from economists ‚Äď and from Obama ‚Äď that the plan would wreck the housing market and send new mortgage rates into the stratosphere,‚ÄĚ The Washington Post reported February 22.
That ‚Äúwithering criticism‚ÄĚ could have come from Jerry Bowyer, chief economist of Benchmark Financial Network. ‚ÄúIt would be a trigger event which would set off chaos in every financial market of consequence on planet Earth and would be a disaster for the
Yet when NBC‚Äôs Tim Russert interviewed
The Economist magazine termed
In contrast, Sen. Barack Obama (D-Ill.) has said he wants to offer $10 billion in bonds to homeowners and give them a tax credit. While both plans have been mentioned by many news print and broadcast outlets, there has been little explanation of the potential economic consequences.
‚ÄúThis seems to be the only area where Obama is not as far to the left as Hillary,‚ÄĚ said Bowyer. ‚ÄúThe downsides are still there, though: bailing out people for high-risk behavior encourages them to do it again ‚Äď economists refer to this as ‚Äėmoral hazard.‚Äô Also, of course, this is tax money taken from productive uses in the private sector to buy votes from people who don‚Äôt like to pay their debts. So, not a very good idea, but nothing like the disruption to capital market transactions under the Hillary plan.‚ÄĚ
‚ÄúEspecially important in
The New York Times reported from the campaign trail in
Dr. Gary Wolfram, a professor of political economy at
Obama‚Äôs plan wasn‚Äôt quite as bad, ‚Äúso he would just steal from us,‚ÄĚ said Wolfram sarcastically. ‚ÄúI saved and paid my mortgage off. So now I would be taxed‚ÄĚ to pay for people who couldn‚Äôt afford their houses, he continued. ‚ÄúThat‚Äôs fair.‚ÄĚ
Bush plan ‚Äėnot enough,‚Äô
Clinton‚Äôs and Obama‚Äôs proposals came after the Bush administration‚Äôs own efforts with ‚ÄúProject Lifeline‚ÄĚ and ‚ÄúProject Hope.‚ÄĚ Project Lifeline included a voluntary 30-day foreclosure delay for seriously delinquent borrowers ‚Äď with six lenders who agreed to the terms. Project Hope, upon agreement with the same six lenders, would freeze adjustable rates for five years on ‚Äúsome subprime loans.‚ÄĚ
That voluntary freeze was criticized in the press as not going far enough.
CBS‚Äôs Bill Plante also knocked the Bush plans. According to Plante‚Äôs February 12 ‚ÄúEarly Show‚ÄĚ report, ‚ÄúThis may not be enough. Last year, 4 percent of even the good mortgages, the prime mortgages, were overdue. Consumer groups say you need more. Consumer groups would rather have these refinanced at lower rates.‚ÄĚ
A New York Times editorial also complained about the Bush plan ‚Äď from the left. The editorial called the plan ‚Äúflawed it its scope.‚ÄĚ
‚ÄúAnd since it is voluntary, if it doesn‚Äôt work, there is nothing the administration can do,‚ÄĚ continued the Times editorial on February 11.
The Obama plan was also criticized in the Los Angeles Times as ‚Äútoo marginal.‚ÄĚ The newspaper wrote on February 21, ‚ÄúEconomists question whether Obama‚Äôs $10-billion ‚Äėforeclosure prevention fund‚Äô would cover the thousands of Americans who already have lost homes and the thousands more who are in danger.‚ÄĚ
Then the LA Times quoted economist L. Josh Bivens of the liberal Economic Policy Institute, who called Obama‚Äôs plan ‚Äúa drop in the bucket.‚ÄĚ But at least the paper included Obama‚Äôs criticism of
According to Austan Goolsbee, the lead economic advisor to the Obama presidential campaign, the senator ‚Äúhas not opposed freezes on rates or freezes on foreclosures ‚Ä¶ He has, however, emphasized that we should not give blanket freezes to everyone such as to the people who have made this problem worse.‚ÄĚ
But Peter Schiff, president of Euro Pacific Capital, said freezes have the opposite problem. In the January 21 International Edition of Newsweek, he said mortgage freezes don‚Äôt benefit lenders; rather, they ‚Äúunilaterally shift the financial pain to lenders.‚ÄĚ
Schiff was specifically criticizing the Bush administration‚Äôs freeze, but concluded that ‚Äúdamaging as the plan may be, it is nothing compared with what some presidential candidates and members of Congress are cooking up.‚ÄĚ
Prominent economist and columnist Walter Williams agreed.
‚ÄúPresident Bush‚Äôs plan to deal with the subprime crisis is to freeze interest rates on adjustable rate mortgages. Freezing interest rates would stop people‚Äôs mortgage payments from increasing. That is a gross violation of basic contract rights and would appear to be a Fifth Amendment violation,‚ÄĚ Williams wrote in a January 23 column.
‚ÄúThe long run effect of the Bush plan is to make lending institutions even more selective in choosing borrowers,‚ÄĚ Williams wrote. ‚ÄúThen there‚Äôs the question: If government can invalidate the terms of one kind of contractual agreement where the borrowers can‚Äôt pay, what‚Äôs to say that it won‚Äôt invalidate other contractual agreements where the borrowers encounter hardship and what will that do to financial markets?‚ÄĚ
Williams was talking about Bush‚Äôs plan, which was a voluntary agreement with lenders. A mandatory rate freeze, like
‚ÄúA mandatory program would have some real constitutional problems,‚ÄĚ said Ted Frank, an attorney who directs the
Wolfram added that undermining contracts could have economic consequences. ‚ÄúMarkets don‚Äôt work real well when you don‚Äôt have contracts,‚ÄĚ Wolfram said. ‚ÄúSanctity of contract is really what came out of the Middle Ages. That‚Äôs why
That would become an ongoing problem, he said. ‚ÄúOnce you set the precedent, how do I know you‚Äôre not going to come along and violate other contracts? If you want to do it that way ‚Äď that‚Äôs fine. The market will respond, housing prices will go down, people will be foreclosed on ‚Äď they can‚Äôt sell their house. And all the people that thought they were going to be better off are going to find out that they‚Äôre worse off.‚ÄĚ
‚ÄėMore Aggressive‚Äô Plan Could ‚ÄėDestroy‚Äô Lending
The news media did occasionally admit flaws with the
CNBC‚Äôs Carl Quintanilla called ‚Äúthe risk‚ÄĚ of
According to Don Luskin, the chief investment officer for Trend Macrolytics LLC, the freeze wouldn‚Äôt simply ‚Äúscare lenders away‚ÄĚ ‚Äď it would ‚Äúdestroy an industry.‚ÄĚ
‚ÄúRight now the mortgage lending business in this country is in the process of shutting down. And you do this to it you‚Äôre going to kill them. They‚Äôll never come back,‚ÄĚ said Luskin, ‚Äúso that‚Äôs going to actually worsen the crisis it is designed to ameliorate.