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Morning Bell: How We Got Here and How Best to Get Out

Posted By Conn Carroll On April 4, 2008 @ 9:07 am In Ongoing Priorities | Comments Disabled

According to the E.J. Dionnes of elite media groupthink [1], the current economic troubles are due solely to unfettered Wall Street greed and the federal government’s only sin was not enough command and control of the economy. Former National Economic Council director Lawrence Lindsey sets the record straight [2]:

Contrary to the claims last year of Sen. Barack Obama, it was never the financial services industry (in my experience) that lobbied for easier lending terms. Rather it was politicians who sought easier lending regulations so more constituents could borrow. Community activists (Mr. Obama’s occupation before becoming an elected official) also put on the pressure.

And as Heritage scholar Ronald Utt details [3], the government’s drive to increase homeownership rates is at the heart of the current financial crisis. After mortgage lenders lowered their standards so credit-impaired borrowers could afford larger loans (usually including no down payment, interest-only payments and negative amortization), homeownership did soar from a historical average of 64% to 69% in 2004. But along with the increased homeownership came a ballooning of the share of “subprime” loans in the overall mortgage market. In 2001 these loans accounted for just $330 billion or 15% of all residential mortgages. By 2006 there were $1.4 trillion of these loans accounting for 48% of all residential mortgages.

Things started to go south for subprime borrowers when housing prices began to fall. As many subprime borrowers found their house worth less than what they owed the bank, the percentage of delinquent borrowers soared to 17%. Many are hopeful that the bottom has been reached and that the market will soon revive, but this seems unlikely. As a consequence, the homeownership rate is likely to fall from its record levels near 69% to something closer to the long-term historic norm of 64%. Under the circumstances, government policies should focus on cost-effective ways to facilitate the transition to a sustainable housing market of fewer homeowners and/or lower home prices, as opposed to a costly exercise to prop up the inflated and unsustainable market that characterized 2004 to 2006. The sole role of government in this process is to ensure that markets are functioning [4], that full and accurate information is available, and that contracts are honored.

While the private market is capable of seeing this process through, a light touch by government can help to accelerate the process and ease the pain. An excellent example of such a light touch is the Hope Now program. At no cost to taxpayers, the Hope Now alliance is already helping more than 160,000 families a month to keep their homes either by modifying their loans or by developing more realistic repayment plans. Contrast that with the current housing bailout being debated in the Senate. The Washington Post reports [5] today: “For anyone hoping to buy a home, sell one or hold onto the one they have, the $15 billion housing bill unveiled in the Senate yesterday may mean nothing more than a bit of extra cash in the pocket.”

Quick Hits:

  • Last night the Senate killed Sen. Chris Dodd’s (D-Conn.) bankruptcy provision [6], clearing the way for the legislation’s passage.
  • Shoring up his amnesty credentials in anticipation of a 2010 run for governor, Mayor Gavin Newsom unveiled a $83,000 television, radio, billboards and bus shelter sign campaign advertising San Francisco as a “sanctuary city [7]” for illegal immigrants.
  • President Bush went two-for-three [8] in his final NATO summit, securing a member nation re-commitment to winning the war in Afghanistan and support for a missile defense system in Poland and the Czech Republic. Bush did swing and miss on introduction of Georgia and Ukraine to the alliance.
  • NATO and Russia reached an agreement Friday [9] to allow the transport of equipment by land across Russian territory to supply the Western alliance‚Äôs peacekeeping operations in Afghanistan.
  • Global temperatures will drop slightly this year, which means global temperatures have not risen since 1998 [10].

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/04/04/morning-bell-how-we-got-here-and-how-best-to-get-out/

URLs in this post:

[1] E.J. Dionnes of elite media groupthink: http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702154.html?hpid=opinionsbox1

[2] sets the record straight: http://online.wsj.com/article/SB120709807127882047.html?mod=googlenews_wsj

[3] details: http://www.heritage.org/Research/Economy/wm1881.cfm

[4] The sole role of government in this process is to ensure that markets are functioning: http://www.heritage.org/Research/Economy/wm1874.cfm

[5] reports: http://www.washingtonpost.com/wp-dyn/content/article/2008/04/03/AR2008040304030_pf.html

[6] killed Sen. Chris Dodd’s (D-Conn.) bankruptcy provision: http://thehill.com/leading-the-news/senate-kills-bankruptcy-measure-2008-04-03.html

[7] sanctuary city: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/03/BA0NVUM70.DTL

[8] went two-for-three: http://www.usatoday.com/news/world/2008-04-03-nato_N.htm

[9] reached an agreement Friday: http://www.ft.com/cms/s/0/90d8d004-0227-11dd-9388-000077b07658.html

[10] global temperatures have not risen since 1998: http://news.bbc.co.uk/2/hi/science/nature/7329799.stm

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