Washington Now Creating Economic Fantasies

February 24, 2009 by  
Filed under Debt and Credit, Loans and Borrowing

The Obama economic team is so desperate to implement its rescue agenda that it is relying on fantasy and myth about our economy and about the laws limiting its authority.

First, Shaun Donovan, Obama’s Housing Secretary, this week was over-the-top vocal in his support of bailing out home buyers who bought too much.  In his fervor, Donovan made a patently false economic statement: “We’ve got to make clear, here, that a foreclosure hurts every American.” Wrong.  Foreclosures provide opportunities for some buyers to become home owners at lower cost.  And for some buyers, that lower cost is the difference that makes home ownership affordable.  If I needed a home, I would be all over the foreclosure re-sale market. Americans who buy foreclosed property are helped by the foreclosure, not hurt. Thus, you could argue that for every American who is directly hurt by foreclosure (the seller), another American (the buyer) is helped.

Donovan’s statement seems to propose that a foreclosure is a permanent condition when in it is not. Mortgage defaults and foreclosures are just market conditions that affect prices.  They are forces that counter-balance and correct the easy credit conditions that inflated prices earlier this decade.  Sort of like living and dying by the sword.  I don’t mind Donovan advocating for his plan (even though I disagree with it).  I do mind Donovan just making things up while he does it.

Some observers will parrot the argument that all property values decline in neighborhoods blighted by foreclosure.  That’s probably true for some neighborhoods.  My response is that a neighborhood that is encumbered by multiple foreclosed properties is also a neighborhood that was filled with homeowners who took on too much risk. Life happens.  Risk takers sometimes don’t fare so well.  But now a new group of American homeowners – hopefully taking less risk – can buy those homes and benefit in the long run.

Another economic myth that has been making the rounds of Congress and the White House is that banks receiving TARP funds should be lending but are not. The problem with this statement is that many of the banks that are receiving TARP funds have not been the lenders of last resort.  Rather, these banks made loans that were re-packaged and syndicated to investors.  Ultimately, a lot of the money that was lent came from the investors.  The banks were making money originating the loans then selling them upstream.  Many TARP recipients are using the money to shore up their balance sheets.  It is unrealistic to expect that all of these banks would suddenly use TARP money to change their lending model.  This is what happens when a plan is thrown together in a panic mode.

Finally, Obama’s plan to use Fannie Mae and Freddie Mac in his scheme to bail-out home buyers who own too much mortgage is probably illegal. When Congress chartered these mortgage lending entities, it imposed requirements that all of its mortgage loans be originated based on an 80/20 debt-to-equity ratio or that the home buyer purchase mortgage re-payment insurance.  Under Obama’s proposed bail-out plan, millions of existing Freddie Mac and Fannie Mae loans would be modified to benefit the homeowner.  As part of this plan, the debt-to-equity ratio and mortgage insurance requirements will be ignored.  How convenient.  Two basic protections for these quasi-governmental institutions (and now the taxpayers) are simply discarded.

Some members of Congress have called the administration’s hand on this, saying that the Obama plan cannot be used unless the statutes that chartered Freddie Mac and Fannie Mae are changed. The White House says it will not ask for a change in the law.  Instead it will pretend that these are not new loans at all and therefore the law does not apply to them.  Let’s see –  you pay a bounty to the lender or loan servicer to tear up one loan and replace it with another loan – but that’s not a new loan?  More fiction created by government.

Clearly the White House stimulus and bail-out plans define mission-creep to the max.  The people behind this mission will not let reality get in their way.  It’s disturbing and costly.

What do you think?  Is Mr. ToughMoneyLove off base here?

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2 Responses to “Washington Now Creating Economic Fantasies”
  1. Rick Beagle says:


    You stated:”The people behind this mission will not let reality get in their way. It’s disturbing and costly.”

    I would like to submit these two articles in response to your post:

    slight blurb from zfacts.com

    and this more fleshed out article from Crooks and Liars.

    There are others, but the graph is a pretty powerful and irrefutable snapshot that seems to be a pattern of wasteful spending by the Republicans (the party of fiscal conservatives no doubt). It is also a pretty damning retort to “Trickle Down Economics”, and that the Democrats are all about wasteful spending.

    At what point do we end the baseless rhetoric in opposition to every idea put forward, and start trying to help the POTUS, congress, and the administration get us out of this mess?

    Sniping may be fun, but historically we have the right party in the WH and congress willing to pull us away from the brink. What are your ideas for them? In case you haven’t noticed, they are sure as heck willing to listen, and modify their plans if something better is presented.

    Something to mull over Tough.
    -Rick Beagle

  2. MasterPo says:

    Rick – I don’t think it’s ‘baseless rhetoric’ to say Obama is spending money like drunk sailor on leave.

    He is the quint-essential tax&spend liberal democrat, except even if he taxed 100% of the income over his arbitrary $250k line he STILL couldn’t get enought revenue to pay off this debt!!

    It’s so bad he sent Hilary over to China to beg them to buy our bonds on her knees (and maybe do something else on her knees if need be, just so long as they buy our bonds).

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