Bush Mortgage Fix Is Really an Insurance Policy

The White House had to act for economic and political reasons.

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"Philosophical debates are great for college campuses. In our universe, they are irrelevant. What counts is politics. In this case, doing nothing is not a political option for the administration. They had to do something." That's how Jaret Seiberg, analyst at the D.C.-based Stafford Group policy research firm, sees the Bush-Paulson subprime mortgage plan to avoid some 1.2 million foreclosures through 2009.

Now an economist might icily argue that when you consider that subprime mortgages make up just 6.5 percent of some 50 million mortgages outstanding in the United States—and only one-sixth of those are seriously delinquent—the market should be allowed to play out the consequences and correct itself. The "no bailout" crowd includes plenty of free-marketeers and diligent "I saved up for my 20 percent down payment" homeowners. Conservative commentator Michelle Malkin, for instance, calls the Bush plan—and the even more ambitious plans offered by Democrats—big-government "Hillarycare for housing" and "a perversion of the American dream."

Malkin and others might well be right. We might just be kicking the can down the road, and there might well be another wave of foreclosures in five years when the freeze ends. And we might be striking a blow against personal responsibility and creating a further reliance on Uncle Sam to save us from ourselves. But administration officials felt they needed to intervene to stop a vicious financial circle where rising foreclosures put even more housing inventory into an already crowded market. And since, as an analysis of Lehman Brothers notes, foreclosures typically sell at about a 25 to 30 percent discount from market clearing prices, another spike in foreclosures would put further downward pressure on home prices. That could potentially drag down consumer spending and further weaken the economy.

And there is, of course, the politics of it all. (FYI: Three of the four states with the most total foreclosures are the 2008 swing states of Michigan, Florida, and Ohio.) As economist Ed Yardeni of Oak Associates puts it, "This is a democracy, not a theocracy. In democracies, we don't do pain very well." And right now voters are feeling pain from rising oil prices, a softening though surprisingly resilient labor market, falling home prices, and a credit crunch. With attitudes about the economy already in the tank, further deterioration might lead to a more expansive and expensive mortgage bailout plans from Congress, as well as punitive regulations like a de facto Sarbanes-Oxley for the mortgage industry. Presidential hopeful John Edwards, for instance, wants a seven-year freeze on rates, a foreclosure halt, a fund to help families move into lower-cost mortgages, a move to let judges rewrite mortgages, and creation of a new federal regulator. And here is Hillary Clinton's take on the Bush plan:

The Bush plan is designed to help as few homeowners as possible. ... America needs a plan that matches the scale of the crisis, and President Bush has failed to deliver it. ... My plan imposes an immediate moratorium on foreclosures; an automatic, across-the-board rate freeze; and the requirement that servicers and lenders provide status reports on how many mortgages they are converting from designed-to-fail to designed-to-work. ... But if the mortgage industry and Wall Street will not shoulder their responsibility, then I will consider legislation to protect servicers and others who do the right thing by modifying loans to help families save their homes, help investors avoid losses, and help the economy.

Cranky voters might also become susceptible to calls for more trade protectionism—as often happens in time of economic stress—such as those emanating from candidates for the Democratic presidential nomination. (Clinton, for instance, is calling for a "time out" from free trade while questioning 200 years of economic theory in support of it.) So the White House is trying to avoid a vicious circle politically, too, and avoid handing the Dems a 2008 sweep. And look, Americans didn't vote libertarian back in 2000. They elected and then re-elected a self-described compassionate conservative which, for better or worse, is what they are getting in 2008.