On September 29 the U. S. House of Representatives rejected a plan proposed by the President and Secretary of Treasury designed to free up frozen credit and stabilize panicking financial markets. The plan is now known as the Emergency Economic Stabilization Act of 2008, or EESA, a somewhat euphemistic moniker for the now unpopular and politically dangerous notion of financial bailout.
Immediately thereafter, the stock market plunged by about 750 points.
This seemed to signal a mistake had occurred. Legislators, spooked by what seemed a violent reaction, went back to the drafting table. This time the Senate, knowing how to get bills passed or make sausage (take your pick), loaded up what started out as a 3-page proposal with an additional 448 pages of “pork.”
The stock market in the meantime attempted a modest recovery. Was this a sign we are back on the right track?
On Friday, October 3, the fattened and sweetened Senate version was easily digested by the House and was signed into law by the President within hours of its passage.
The next trading day (Monday, October 6) saw overseas markets tanking and the NYSE lose 8% of value to bring the Dow Jones Industrial Average to its lowest level in over 4-years.
Does this signal that we are not on the right track after all? Perhaps the markets’ reactions tell us that we may only be attacking one aspect of a failing system (or the markets just don’t have as much an appetite for pork as Congress does).
Two noted economists from prestigious Columbia Business School strongly suggest that the place where we should begin to address the vicious downward cycle in financial markets is housing. The cycle started with falling housing values which caused losses in securities backed by housing units. Those losses reduced bank capital. Tightening of credit markets ensued, which caused housing values to fall still further.
In an October 2, 2008 piece written for the Wall Street Journal. professors R. Glen Hubbard and Chris Mayer have articulated a bold yet simple plan to underpin the slide in housing values. Allow homeowners to refinance mortgages on their primary residence into 30-year fixed rate mortgages at 5.25%. For those with property worth less than the outstanding balance of their mortgage, the government could “write-down” the amount owed in exchange for an equity position in the property. This would allow the taxpayers to recover the subsidies and even profit from them when the housing market rebounds. Hubbard and Mayer contend that this program is clearly feasible and may be implemented immediately and at little cost due to the fact that the US government now controls about 90% of the mortgage market.
Now, before jumping to any conclusion and painting these guys as just another two wacky, wild-eyed socialists from academia, note that Dr. Hubbard was Chairman of the Council of Economic Advisors under President George W. Bush.
This may be a plan worth pursuing. I wonder if anyone in Congress has the energy or drive to engage in studying this proposal. Or are they just too groggy from all that pork? What do you think?
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After reading the Wall Street Journal piece you refer to in your blog post I am left with one question. Why are we injecting ourselves into a somewhat natural correction of the Real Estate market? This entire crisis began with one very simple assumption… No matter what happens in the rest of the economy, the value of real estate will always rise. This false sense of security along with the directive to lend to those without the means to pay, led to where we are today. This correction was destined to happen when we all lost touch with reality. Though corrections in any sector of the economy are hard on us all, we must study our history to find our way forward.
This is not the first time we as a nation or even as a world economy have lost our minds. If you look back to the Panic of 1873 you’ll see, plainly illustrated, that every now again we reap what we sow. We cannot force a bottom to this natural correction as this plan tries to do. What we can do is make sure that people can afford to pay their mortgage’s. It’s become a foreign concept in this country that we try to help our citizen’s from the bottom up. We have seen the effects of Reagan, Trickle Down, Voodoo Economics and it doesn’t work. For the first time we have seen this economic philosophy in action and it’s an unmitigated failure. Reagan tried to implement this philosophy but never truly succeeded due to a Democratic majority in both houses of congress all through the 1980’s. George W. Bush didn’t have this problem. We now know that deregulation and huge tax breaks for giant corporations lead to greed and corruption while nothing more than a 10 trillion dollar national debt tricked down to the taxpayers. We must restructure our economy to trickle up!
This begins with backing out of bad trade agreements and reforming a pseudo protectionist economic philosophy. Our trading “partners” around the world are not keeping up their end of the bargain. We must bring jobs home and impose tariffs! We must invest in clean, renewable energy recourses, just as Franklin Roosevelt and my person hero Dwight Eisenhower invested in infrastructure. American ingenuity can and will lead to energy independence and in the process give good, high paying jobs to millions and spurring economic growth. These simple changes in our economic theory will allow people to pay their debts, including their mortgages. Thus home values will further stabilize and the crisis will be over. That is, until we lose our minds again.
Pork not withstanding, the EESA is nothing more than an unnatural propping up of a failed economic theory, and its failure will only be exasperated by our meddling efforts to create a false bottom from the top. Look to the bottom, look to the middle class. Help them, give them jobs, and we will give ourselves a functional, growing economy.
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