johnnymk

http://www.nytimes.com/2007/08/18/us...hp&oref=slogin

It didn’t take a crystal ball to see that the collapse of the housing bubble was coming and that many home borrowers who took out risky loans were about to be squeezed. The warning signs, which have been visible for at least two years, were clear and repeated.

Candidate Topic PagesMore Politics NewsBut this was the month that both Wall Street and Washington finally woke up to the nightmare. And strangely, once the reaction set in, panicked investors worried about losses in their portfolios found themselves on the same side as Democrats expressing concerns about struggling homeowners, both clamoring for the government to do something — anything — to contain the crisis. Meanwhile, the White House and Republican candidates counseled patience and letting the market take its toll.

Indeed, the uncertainty surrounding the housing and market turmoil brought out the differences between Republicans and Democrats in stark relief.

Rudolph W. Giuliani, in an interview with Larry Kudlow on CNBC, said it was up to “the market to straighten out, and it will.” As president, he added, he would “not succumb to the temptation of trying to manipulate it too much and come in with a bailout.”

As for investors, Mr. Giuliani said, “you have to take responsibility for the decisions you make. If you invest in something risky, you get a possibly greater return. Everyone knew that sub-prime was risky.” As a result, he added, when the loans go bad, “you have to live with the consequences.”

By contrast, Hillary Rodham Clinton presented a multipoint plan “to preserve the American dream of home ownership” that she said would “curb unfair lending practices and hold brokers and lenders accountable, give families the support they need to avoid foreclosure and increase the supply of affordable housing.”

At the heart of Mrs. Clinton’s proposal, an idea shared by several other Democrats in Congress, is a $1 billion fund to assist homeowners facing foreclosure, along with an expansion of the role of Fannie Mae and Freddie Mac, the two government-sponsored corporations that back home mortgages, so that they could take on somewhat riskier loans themselves.

Foreclosures are already on the rise. And they are bound to get a lot worse.

But the difficulty facing any politician who wants to help average Americans at risk of losing their homes is that doing so inevitably serves to bail out the Wall Street investors who are carrying the loans as well. That only encourages them to take more bad risks in the future, secure in the knowledge that the government is likely to step in to protect them from their follies.

Moreover, it is doubtful that most of the recent home buyers — particularly those in the middle class who took out risky, adjustable rate loans with little or no down payment so they could buy a more expensive house — were simply innocent bystanders themselves, unwitting victims of predatory lenders.

This is a problem recognized not just by free market conservatives, but by activist liberals as well.

“I don’t see a way you could reasonably help the people you want to help,” said Dean Baker, co-director of the Center for Economic and Policy Research, “without also helping people you don’t want to help.”

In a blog posting, Mr. Baker, who has been presciently warning of the dangers from the housing bubble for several years, elaborated on his argument: “The bailouts being discussed would quite likely benefit holders of mortgages that might otherwise by nearly worthless. Some of the holders of these mortgages include banks and also hedge funds,” he wrote. “It is said that hedge fund managers are highly skilled investors. Since they can get the Senate to bail them out when they get in trouble, I suppose that is true.”

Even without a direct bailout, Congress may well step into the middle of the mess by authorizing Fannie Mae and Freddie Mac, which already hold about $1.5 trillion in mortgage securities, to acquire a larger portfolio of loans, including some of those most at risk of default. Beyond that, Fannie is seeking to raise its approved lending limit for home mortgages, currently set at $417,000, so that it can “better help the market during this period of distress.”

But many economists worry that Fannie and Freddie, which have an implicit government guarantee against failure that allows them to borrow money at lower rates, should not be going after additional loans. Moreover, their expansion beyond their basic mandate to help low- and moderate-income homebuyers encourages private lenders to take on riskier loans themselves as the only way to survive in the mortgage business.

“Fannie and Freddie both have serious accounting problems already,” said Edward Glaser, a professor of economics at Harvard. “Do we really want them taking on additional risk right now for taxpayers that the private sector doesn’t want?”

Professor Glaser, like many other economists, also worries that an after-the-fact government bailout, whether done directly or through Fannie and Freddie, will only delay the necessary and inevitable adjustment in the housing market.

“Most of this can be worked out through normal banking channels,” Mr. Glaser said. “The power of government should be used to help people in real hardship.”

But once “politicians get involved it has every prospect of mushrooming out of control,” he added, “taking care of middle-class voters simply because they are facing foreclosure rather than focusing on people who are really poor and those who stand to lose real money because they put in a significant down payment.”

The ideal policy, argued Paul Krugman in an op-ed article for The Times, is for the government to “say no to bailouts,” but “help borrowers work things out.”

But it is hard to see how Washington would make that work in practice without, as he put it, “letting the parties who got us into this mess off the hook.”

Maybe that explains why so many on Wall Street are suddenly clamoring for the government, including the Federal Reserve, to help out. The free market is fine as long as things are going good. It’s not so popular when you’re losing your shirt.

Maarchk

Well if the government helps out like they did with Katrina, then it will be fine with me.

These people need to be responsible for their actions.

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zippyjuan

Certainly the lenders should not be bailled out- they knew the risks of the loans when they either issued them or purchased the loans in the secondary market. If the loans were fradulently presented to borrowers, then that is a different question. There is so much paperwork involved in buying a house many probably just asked how much their payment would be. When told they may go up in the future, they were probably reassured that that would not be a problem- that they would probably refinance before then. "rates could even go down- and then your payment will too!" I had enough knowledge that I wanted a fixed rate and then refinanced again when they did drop for me.

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VTGreg

If there were fraudulent practices that is one thing, but not paying attention, asking questions and reading the fine print on something that you will be spending a large portion of your income on is on the borrower IMO. Incompetence is not a solid defense.

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