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The battle over the Omnibus Appropriations Act, 2009
(H.R. 1105, hereinafter “the Omnibus bill”) is shaping up as a fight against earmarks. Considering that the Omnibus bill has a price tag of $410 billion and the earmarks amount to about $7.7 billion*, this seems a clear case of missing the forest for the trees. It’s true the earmarks make a handy stick with which to beat President Obama as John McCain did when he quoted this pledge by then-candidate Obama:
We need earmark reform and when I'm president, I will go line by line to make sure we're not spending money unwisely.
It’s also true that the earmarks make much more interesting theater than the rest of the bill. How can funding for the humdrum, day-to-day aspects of government compete with earmarks like those for Swine Manure Research, Tattoo Removal, and preserving parts of Historic Tiger Stadium. Whatever the political reality, however, the financial reality is that eliminating all the earmarks would still leave a massive spending bill and I think the size of the bill as a whole is what deserves attention.
Having said that, I must nonetheless confess that I was mesmerized by the list of earmarks and then by the realization that while the word “earmark” was thrown around quite freely I wasn’t entirely sure what it meant. So I decided to poke (heh, heh) around a little and see exactly what earmarks are, whether they are always a bad thing, and - when they are bad - how to most effectively argue against them.
Wikipedia’s definition of “earmark” seems somewhat out of date but the relevant portions read:
The federal Office of Management and Budget defines earmarks as funds provided by Congress for projects or programs where the congressional direction (in bill or report language) circumvents Executive Branch merit-based or competitive allocation processes, or specifies the location or recipient, or otherwise curtails the ability of the Executive Branch to manage critical aspects of the funds allocation process. [snip]
Earmarking differs from the broader appropriations process, defined in the Constitution, in which Congress grants a yearly lump sum of money to a Federal agency. These moneys are allocated by the agency according to its legal authority and internal budgeting process. With an earmark, Congress has given itself the ability to direct a specified amount of money from an agency's budget to be spent on a particular project, without the Members of the Congress having to identify themselves or the project.
Obviously the anonymity aspect of earmarks has long since gone by the board. What’s important here is that instead of the Legislative Branch just handing money to the Executive Branch to spend in accordance with existing laws and procedures, the Legislative Branch gets into the nitty-gritty and directs specific money to go to specific projects. So, for example, instead of the Federal Department of Transportation simply getting $1 million more this year than last to spend as it believes proper and legal, Congress gives the Department $1 million and says, “Spend it on this particular project.”
Since “earmark” is often used interchangeably with “pork-barrel project” or “pork”, I checked Wikipedia’s definition of “pork” also (emphasis mine):
Typically, "pork" involves funding for government programs whose economic or service benefits are concentrated in a particular area but whose costs are spread among all taxpayers. Public works projects, certain national defense spending projects, and agricultural subsidies are the most commonly cited examples. [snip]
Pork-barrel projects, or earmarks, are added to the federal budget by members of the appropriation committees of United States Congress. This allows delivery of federal funds to the local district or State of the appropriation committee member, often accommodating major campaign contributors. To a certain extent, a member of Congress is judged by their ability to deliver funds to their constituents. The Chairman and the ranking member of the U.S. Senate Committee on Appropriations are in a position to deliver significant benefits to their States.
Does this mean earmarks and pork are the same thing? Not necessarily. Consider this discussion from a 2008 NPR show:
BOB GARFIELD: But [earmarking] is, historically and ultimately, a legitimate legislative mechanism, isn't it?
JONATHAN WEISMAN: Absolutely. You know, the Iraq Study Group, that bipartisan group, was earmark. It was created as [LAUGHS] a little, what we would call a pet project by a congressman from Virginia, Republican Frank Wolf. Most research into breast cancer is done through earmarks.
Earmarks are the method by which members of Congress can exact policy. [snip]
Well, let's put it this way. If you didn't do these earmarks you’re probably going to have little to no effect on the federal budget. It’s not that the Congress is piling on additional spending. It’s just carving out the spending that would already be there.
It used to be that a huge pot of money would just go to, say, the Department of Transportation. Then the Department of Transportation would farm that out to State Departments of Transportation or local road authorities and they would decide how to spend the money. It simply would give the bureaucracy more power in deciding how to spend that money.
There’s a balance here to be struck between the prerogative of Congress and the ability of bureaucrats, basically, to set their own their priorities.
As Weisman makes clear, there is a distinction between an earmark and a pork-barrel project. An earmark is a targeted expenditure outside the normal Executive Branch spending guidelines. If it benefits solely (Old Tiger Stadium) or mostly (swine manure) one State, it’s pork. If it benefits the nation as a whole (the Iraq Study Group) or people across the country (breast cancer research), it’s not pork. This is not cut and dried, of course. An earmark that funds breast cancer research can look pretty porcine if all the funds go to one research center in one Congressional district. Conversely, an apparent pork-barrel project may initially benefit only one State but have clear benefits for the entire country. Military bases are the classic example of this: a particular State benefits from the construction and then from the presence of military consumers but the entire country benefits from the military and the bases have to go somewhere. Despite occasional fuzziness, however, I think the distinction between earmarks and pork is useful. Why? Because it tells us we have three different types of spending in the Omnibus bill:
1) What we can call “normal” appropriations which appropriate money for ongoing government operations. Through this, for example, the Federal Department of Transportation is given a certain amount of money which it can spend directly or allocate to State Departments of Transportation as provided in existing laws and guidelines. This type of spending accounts for about 98% of the Omnibus bill.
2) Non-pork earmarks which appropriate money for a specific purpose that can reasonably be claimed to benefit the country as a whole or to benefit people across the country. I have not seen any claims that there are these types of earmarks in the Omnibus bill although there may be.
3) Pork-barrel earmarks which appropriate money for a specific purpose that can not reasonably be claimed to benefit the country as a whole or to benefit people across the country. Instead, pork-barrel earmarks benefit mostly a particular State or Congressional district or a particular interest group whose benefit is not also a benefit nationally. Presumably the entire $7.7 billion worth of Omnibus bill earmarks that so many people are inveighing against consists of these pork-barrel projects.
In terms of whether they should be opposed and if so how, I don’t see any difference between non-pork earmarks and normal appropriations. They are both spending that can be reasonably claimed to benefit the entire nation. If someone wants to oppose instances of these types of spending, there are three obvious arguments he can use: there is no true benefit; the cost outweighs the benefit; or the benefit outweighs the cost but we simply cannot afford it. The first is usually in the eye of the beholder while the second should be calculable but often is not. It is the third argument that is most interesting right now.
One side of this argument holds that given the terrible financial condition of the Federal government, it should be attempting to spend less. The other side - which currently holds sway in Washington - claims that precisely because the financial situation of the country as a whole is so terrible the Federal government should be spending more. Democratic Senator Evan Bayh, with his call for austerity and belt-tightening on the part of the Federal government, is an excellent example of the spend less side; President Obama, with his vast array of spending proposals, personifies the spend more side.
There is, however, a fourth argument that can be made against normal appropriations and non-pork earmarks: Federal spending should be cut, period. This is not the same as Bayh’s argument. In fact, he explicitly says (emphasis mine):
The omnibus increases discretionary spending by 8% over last fiscal year's levels, dwarfing the rate of inflation across a broad swath of issues including agriculture, financial services, foreign relations, energy and water programs, and legislative branch operations. Such increases might be appropriate for a nation flush with cash or unconcerned with fiscal prudence, but America is neither.
In other words, if we could afford it this huge increase in the Federal budget might be fine; it’s only because we can’t afford it that it’s problematic. Similarly Republican Senator Tom Coburn when criticizing the Stimulus Package spoke of the increase in debt and of the need “to lessen the waste, fraud, and abuse, the inefficiency, and to make choices on what is more important.” What he did not do was suggest that perhaps Federal spending was too large even aside from waste, fraud, abuse, and inefficiency. He did not suggest that perhaps there are some functions the Federal government should not be doing.
As everyone surely knows by now, Rahm Emanuel said that a crisis is “an opportunity to do important things that you would otherwise avoid” and the Democrats have taken his words to heart by arguing that economic disaster is the perfect climate for huge spending both through enlarging existing programs and through creating new programs like universal health care and green energy. Perhaps the Republicans - assuming any of them are still in favor of a small Federal government - should also adopt Emanuel’s approach and use the crisis to argue that far from being the time for more Federal spending this is a perfect opportunity to start figuring out what functions - and therefore costs - we don’t need from Washington. In other words, mount an opposition to the massive increase in normal spending that isn’t based on claiming this is not a good time for such expansion but is instead based on insisting there is never a good time for it.
Next up: The wrong way and the right way to oppose pork-barrel earmarks
March 10, 2009: This is now up.
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* The price tag for earmarks seems to vary depending on who is adding it up. Democrats are - or were -
estimating $3.8 billion. The Heritage Foundation says nearly $13 billion. My $7.7 billion number came from Taxpayers for Common Sense and is the number I’m seeing most often. Their link discusses why their number differs from the one the Democrats came up with. A lot of that disparity is because:
the Appropriations Committee chooses not to include earmarks from project-based accounts in their totals, despite the fact that they were not requested by the administration. For example, the Corps of Engineers budget is made up of hundreds of projects that add up to the agency total. These numbers are not included in the committee totals or in their reduction predictions. In addition, the committee ascribes many operations and maintenance projects to the President when they were not actually requested as part of the FY09 budget.
They also “found a lot of ‘looks like earmark, talks like an earmark’ provisions in the bill that we tally as ‘undisclosed’ earmarks” and seem to believe there are more to be found.
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Sources and reading:
Coburn Corruption and Waste Elimination Amendments - This focuses on provisions Senator Tom Coburn (R, OK) opposes but the pdf links in the “Related Resources” section lets you see all the earmarks in the Omnibus bill.
Jamie Dupree is a blogger at WSB Radio in Atlanta who is happily slicing and dicing the data on earmarks. Skim through his archives but the posts I found particularly interesting were:
Omnibus Earmarks, Part 1 - This is a partial list of earmarks in the Omnibus bill. It’s much of the same data you can find at Coburn’s site but it’s nicely formatted and easily searchable.
More On Omnibus Earmarks - This is a list of solo earmarks.
Even More Omnibus Data - Lists earmarks by Senator
Senatorial Pork Barrel - Talks about how pork comes from both sides of the aisle.
So the military has decided to allow media coverage of military coffins coming home to Dover Air Force base. The CNN article (via Villainous Company) quotes the mother of a serviceman who died in Iraq as saying:
I wanted the nation to grieve with me, and if we don't see those images we don't know that these young men and women are dying.
And to me it's an honor to have an honor guard at Dover when they're bringing these men and women back through the mortuary. But we've never been able to see those pictures of the honor being given.
I don’t have any quarrel with her wish to have the nation grieve with her or her wish to be able to see for herself - and have the rest of the nation see - the honor given to the war dead. I have long believed that the separation between those who serve in the military and those who have no contact with military is dangerous for both the oblivious society and the ignored military. Furthermore, we do owe those who pay the ultimate price for us grief and honor.
The problem is that it seems unlikely opening the ceremonies to the media will result in knowledge or acknowledgment, in grief or honor. Instead the pictures will most likely become a backdrop to a steady drumbeat of anti-war rhetoric. In other words, the caskets of men and women who died for a cause in which most of them believe will be used to vilify that very cause.
At one time, Michael Moore had up on his Website - without permission - a Michael Yon photograph of a dead Iraqi child named “Farah”. Yon objected to this and his post about it is a remarkably clear statement of why intent matters:
But at some point, especially when the material is used to make political points, images of combat can cross the line into pornography. People die in war, but we must never forget that each casualty is a human being ... The photo, as I took it, is the truth, but Moore uses it – illegally – to convey falsehoods. His mind is that of a political propagandist who sees Farah’s death not as a human tragedy, but a tool.
That is what I fear will happen at Dover: the pictures will be the truth but the message conveyed will be a falsehood. The media will show the dead but say nothing about what they themselves believed about risking death.
The decision is made, however, and now all we can do is watch and see how the media uses this access. If they treat the arrivals at Dover with respect (think the “In Memoriam” segment of This Week with George Stephanopoulos) then lifting the ban will provide an opportunity for the larger society to reconnect with the military, to grieve with their families, and to honor their courage. If, as I fear, the media treats the arrivals as a reason to denigrate the very reason for which the servicemembers died (think Keith Olbermann) then lifting the ban will be exquisitely and unforgivably cruel.
More prosaically, if the media does take the “Dover caskets as anti-war propaganda” approach, Obama may find himself with a serious political problem. Now that Obama has announced a timetable for withdrawal from Iraq, he can probably continue to blame - or count on the media to blame - Bush for the war dead from that country until the “combat mission” end date of August 31, 2010. Afghanistan, however, will rapidly become Obama’s war, if it has not already done so.
Obama has committed 17,000 additional troops to Afghanistan and may commit more. However much the media adores Obama, they will be hard-pressed to avoid laying the arriving Afghan war dead at his feet. And if the American public’s acceptance of casualties is based on their belief that “a war is worth fighting” then the news that while 50% of all Americans think Afghanistan is worth fighting only 36% of Democrats agree indicates the ceremonies at Dover may cause Obama trouble with his own party.
Finally, a note about word choice. The CNN article I cite above begins:
The Pentagon will lift its ban on media coverage of the flag-draped coffins of war victims arriving at Dover Air Force Base in Delaware, Defense Secretary Robert Gates said Thursday.
“Victims”? A child caught in the crossfire of a drive-by shooting is a victim. An old lady with early Alzheimer’s scammed out of her life savings is a victim. Men and women who chose to join the military, served their country bravely, and died in her defense are not victims. They are honorable and courageous and deserve - demand - our respect and our admiration, not our pity.
I touched on this in my previous post but what the heck did happen to TARP? You know, the $700 billion “Troubled Assets Relief Program”? It was supposed to buy up all the toxic mortgage-based securities that were bringing the financial system to its knees. So far as I know, it has yet to purchase its first toxic asset and now - son of a gun - Treasury Secretary Timothy Geithner is asking for $1 trillion (yes, with a “t”) to - surprise - clear the toxic assets from the financial system. Five months later, still no word on how the heck the toxic assets will be priced:
I’m very much afraid that the analysis at Naked Capitalist which insists that there are bottom-feeders currently willing to buy; that the asset holders refuse to sell for what the bottom-feeders are offering; and that the government will offer whatever the sellers demand in order to get their hands on those assets looks like what will happen.
I guess the nice thing about the government recycling proposals and problems is that I can just keep recycling posts.
Obama has announced his Homeowner Affordability and Stability Plan (HASP). It’s oddly difficult to get a sense of what the whole plan is about although supposedly all will be revealed on March 4. You can read the official information here and Bloomberg has a Q&A. But let’s start with a USA Today editorial which identifies three main elements in HASP:
1) Current rules make it difficult for homeowners to refinance when the amount of their mortgage is more than 80% of the current value of their home. HASP “will make it easier for certain homeowners to refinance to lower rates if their mortgages are 80%-105% of the value of their homes.”
2) For “certain homeowners facing foreclosure [t]he government and lenders will share the cost of bringing mortgage payments down to 31% of monthly income.”
3) Obama “would alter bankruptcy law to allow judges to modify troubled mortgages just the way they do virtually all other debts.” This portion of the plan requires legislation; that is, this is the only part of Obama’s plan that he cannot impose by fiat.
Let’s dispose of the third portion of the plan first. This won’t cost the taxpayers anything directly but it does seem to me that it will make mortgages more difficult to get since it puts lenders at a distinct disadvantage. This will make it harder for people to buy homes in the future and harder for the housing market to recover much less rebound.
Furthermore, most mortgages are:
de facto or de jure ‘no recourse’. This means that the debtor cannot be held personally liable for the mortgage even if, after a foreclosure, the bank receives only a fraction of the total mortgage outstanding from the sale of the house.
With a ‘no recourse’ mortgage, the debtor effectively receives a virtual put option to ‘sell’ to the mortgage-issuer the house at the amount of the loan still outstanding.
Obama’s proposed change to the bankruptcy laws will set up an asymmetry in which a lender can be forced by a judge to eat part of the homeowner’s loss while the homeowner will still be able to simply abandon the house whenever he chooses. To redress that imbalance, we could change the other side of the equation so that any mortgage that can be changed by a bankruptcy judge is always a recourse loan. However, this would probably just encourage generous judges to be even more generous.
This leads me to the third problem with this proposal: a homeowner’s result depends entirely on how kind a judge he gets. I realize this is the case with other aspects of bankruptcy but I suspect it won’t take long for stories to start appearing in which two virtually identical cases have vastly different outcomes because one case is heard before a sympathetic judge and the other before a tougher one.
In other words, I think the modified bankruptcy element of Obama’s plan is a bad idea. Now let’s consider the elements that cost taxpayers money directly. The first two elements have a price tag of $75 billion. As far as I can tell, this includes financial incentives for lenders to refinance (probably $1000 per loan up-front then monthly or annual payments for some period); government payments of interest as needed to bring monthly payments down from a refinanced rate of 38% to the desired rate of 31%; and flat payments to homeowners who refinance and remain current for some period of time. (There is also a provision - not mentioned by USA Today - to pump money into Fannie Mae and Freddie Mac. I’m not going to discuss that but according to National Review this has a price tag of either $200 billion or $400 billion. Like I said, it’s hard to figure out exactly what’s in Obama’s proposal.)
So how will the first two elements of Obama’s plan work? Let’s consider two couples who are recent homeowners. Look first at John and Mary. They were both working a year ago making identical salaries when they bought a house. They had saved up their pennies for a few years beforehand and made a 20% down payment. The monthly house payments accounted for 25% of their combined take-home pay. Miraculously, they live in an area where the value of their house has not declined and after making payments for a year the amount of their mortgage is now 79% of the house’s market price. John loses his job. The house payments now account for 50% of the couple’s take-home pay. Nonetheless, they have cut other expenses to the bone and are still current on their payments. They do not qualify for Obama’s help. Because their mortgage is less than 80% of their income they can probably refinance without government help but there’s no guarantee of that since their income is now greatly reduced.
Right next door live Sam and Jane. Through an eerie coincidence they, too, were both working a year ago making identical salaries when they bought a house. Since they hadn’t saved their pennies, they only made a 5% down payment on their house but since they made more than John and Mary their monthly house payments also accounted for 25% of their combined take-home pay. Like John and Mary’s house, Sam and Jane’s house has held its value and after making house payments for a year the amount of their mortgage is now 94% of the house’s market price. Sam loses his job. The house payments now account for 50% of Sam and Jane’s take-home pay. Like John and Mary, Sam and Jane have cut expenses to the bone and are still current on their payments. Unlike John and Mary, however, Sam and Jane do qualify for Obama’s help because the amount of their mortgage is more than 80% of the current value of their home. The government will encourage their lender to refinance their mortgage perhaps at a lower rate than John and Mary could obtain without government sweeteners.
Now let’s imagine that instead of cutting expenses to the bone and staying current, Sam and Jane stopped making their mortgage payments when Sam lost his job. They are now in danger of foreclosure. That means they qualify for even more government help. Not only will the government encourage their lender to refinance, it will take on part of the interest payments to get their mortgage payments down to only 31% of their income.
The probable result is that John and Mary, who arguably made the more financially responsible decisions - a larger down payment and staying current on their mortgage - will be forced to sell their home. Yes, they will get back their down payment but if they can even manage to buy another house it will have to be a cheaper one partly because their income has been reduced and partly because they may have to pay a higher interest rate than Sam and Jane. Sam and Jane on the other hand will see some of their indebtedness paid by the government, will be able to stay in their more expensive home, and will never have to repay the taxpayers - including John and Mary - for their help.
But isn’t this sort of what I was proposing with my Bottom-Up Bailout (BUB)? No. First - and most important - under BUB, homeowners who got any type of monetary help from the government had to repay that help when they sold their home. Homes, actually, because the debt remained until it was paid off regardless of how many homes the owners went through. Someone seems to have pulled the chain on this light bulb at least for a couple of people at The Corner. Stan Liebowitz says:
Yet the government asks nothing in return from those being helped, even though it wouldn’t lend money to business without asking for something in return. Yet it would be easy to design a plan that had any helped homeowner pay back the help they are receiving out of any future capital gains on future house sales.
His co-blogger, Victor Davis Hanson, offers what he calls “a modest proposal”:
If you want the government to come in to rescue your mortgage, either by subsidized lower interest or reduced debt or both, then any future profits (not entirely impossible) you make at the time of any future sale must be divided 50/50 with the government.
Well, duh. Or to be more polite: Frankly, this seems to me to have been such an obvious provision for Obama to include - as Hanson says, “It seems a way to placate criticism that 92% are bailing out the less responsible 8%” - that I am tempted to assume there is some specific reason for not including a pay-back provision. Perhaps the portrayal of the mortgage holders as “victims” would be undercut by such a provision. Or perhaps the assumption is that those being bailed out will be the same people who would not be able to own homes at all unless the government had pushed for them to do so. In that case, a pay-back provision might have been considered undesirable because their problems are the government’s fault in the first place or because the government continues to believe they need help without responsibility. Or perhaps this omission really is simple incompetence or political tone-deafness.
As for other differences between Obama’s plan and BUB, I can pretty much just copy and paste the reasons BUB was better than FDIC Chairwoman Sheila Bair’s earlier mortgage plan:
1) BUB cleans up all primary residence mortgages where the amount of the mortgage is more than 80% of the house’s current value with no top end limitation). HASP only cleans up mortgages where the amount of the mortgage is between 80% and 105% of the house’s current value so if your home has lost a lot of value you're toast. Unlike HASP, BUB also cleans up all primary residence mortgages where the homeowner’s payments are more than 25% of income. Under HASP, if you have a mortgage that's seriously underwater or your payments are eating you alive, you're only going to receive help if you stop making payments and flirt with foreclosure.
2) BUB reduces mortgages to no more than 25% of income not 31% as Obama proposes. BUB thus frees up more disposable income which will translate into more spending. (In the long run. In the short run I hope people are smart enough to dig themselves out of debt first.)
3) BUB promulgates fixed-rate mortgages. Because Obama’s plan allows interest rates to rise after some number of years, he is essentially calling for adjustable rate mortgages. (Isn’t that part of how we got into this mess?)
4) BUB reduces principal; this helps soften the landing for the housing bubble implosion. Obama does not reduce principal; this keeps housing prices jacked up too high. (Obama’s plan does avoid Bair’s error of encouraging 40-year mortgages.)
In other words, as I said about Bair’s plan:
If you want a plan to help individuals because you feel bad for those who are losing their homes, this is fine. If you want a plan that will help stabilize the economy then this is - I’m sorry - just plain stupid.
Let’s face it. If only 8% of the people who have mortgages have any need for help, if a “mere” $75 billion can clean up the housing meltdown, then how much of a crisis do we really have? Either we’ve been sold a bill of goods about the underlying cause of the economic crisis or Obama is putting a band-aid on a mortal wound or Obama is proposing just the first round in what will be a continuing series of homeowner bailouts. I suspect the last is closest to the truth. As Phil Kerpen points out, deja vu in the housing bailout arena has been the order of the day.
Another factor that favors BUB is that it spreads the pain to the lenders. BUB requires them to take a 25% hit on the principal pay-down; Obama pays them off for refinancing. If we don’t want to encourage bad behavior, it’s far wiser for lenders who were greedy or stupid to take their lumps as a reminder to behave better in the future.
Last but not least, there is another huge problem with Obama’s plan that was also a problem with Bair’s plan - although I did not address it in my earlier post. Unlike my BUB proposal, Obama is not advocating regulation to insure we do not get into this mess again. Obama is not proposing legislation to require 20% down payments or perhaps even higher down payments when home prices are skyrocketing. Not only does he not want to eliminate adjustable rate mortgages or teaser rates, his own plan is an ARM plan. He is not proposing banning credit default swaps nor is he proposing any new Glass-Steagall type legislation. He is not proposing any penalties for or regulation of the rating agencies which seem to have been wandering around aimlessly slapping “AAA” sticker on all the garbage tranches. In other words, he wants our money to clean up the mess but is not doing anything to prevent the same thing from happening down the road.
And don’t tell me we have to stop the bleeding first then worry about everything else. Obama is the man who says, “We cannot successfully address any of our problems without addressing all of them.” He claims to be able simultaneously:
to create three million jobs, to redesign the health care system, to save the auto industry, to revive the housing industry, to reinvent the energy sector, to revitalize the banks, to reform the schools — and to do it all while cutting the deficit in half
Surely someone able to juggle all those tasks should have been able to couple his mortgage bailout with the regulatory and procedural changes necessary to insure we don’t need another one. Obama asking for my money to patch the housing crisis without fixing the underlying problems is like a roofer who charges you for putting a bucket under the leak in your kitchen ceiling: it doesn’t fix anything permanently and you know he’ll hit you with another bill when he comes back in a little while to empty the bucket.
Finally, a few words about fairness. My BUB proposal is unfair in the sense that it favors homeowners over renters and in the sense that, yes, some homeowners who were not innocently caught up but were actively rapacious would benefit. (At least I, unlike Obama, am willing to be up front about that.) In BUB’s favor, though, I would argue that it is at least as aimed at stabilizing the economy as were the $700 billion TARP bill; the money for the auto companies; the stimulus bill; and a seemingly endless list of other bailouts. We were told - and are still being told - that giving our money to companies that were greedy or stupid or both isn’t really fair but everyone will benefit in the end when the economy stabilizes. And besides the government will get all this money back someday. I believe I can make the same arguments for my BUB proposal and far more realistically. The pay-back feature; the greater inclusiveness; the more drastic reduction of payments; the insistence on fixed rate mortgages; the attempt to soften the landing for house prices without keeping them jacked up to prolong the bubble: all these elements address the economic problem as a whole rather than just targeting a handful of homeowners. Obama can not claim the same for HASP.
Oddly enough, however, that conclusion does not lessen the anger I feel toward Rick Santelli and those who have organized Tea Parties in response to him. I’m not saying Santelli and the Partiers shouldn’t be mad; they should be furious and I am, too - at least when I’m not feeling ill. It’s just that what touched off their outcry was a proposal by the government to help people with their mortgages. Not TARP; not the bailouts of various financial institutions; not the bailout of GM and Chrysler; not the stimulus package. According to Santelli, Obama’s mortgage plan “is promoting bad behavior.” And this makes it different from the earlier handouts how?
If Santelli was arguing that HASP was badly constructed and a better mortgage bailout plan was needed, I would be less angry with him. Instead he’s arguing that people who can’t pay their mortgages are “losers” who have no chance to “prosper down the road”. Does Santelli believe that the huge financial holding companies that tied themselves to those bad mortgages and keep coming back time after time for yet another handout are going to magically prosper somewhere down his road? How about the auto companies that haven’t made profitable cars in years? And what definition of “prosper” could possibly apply to all the pork barrel projects crammed into the stimulus package? Is Santelli saying it’s okay to give hundred of billions (not millions, billions) of taxpayers’ money to these “losers” but giving any money at all to homeowners makes Jefferson and Franklin “roll over in their graves”? Does he really expect me to buy the argument that AIG can be greedy and stupid and heavily implicated in poisoning the entire economy and still get government money (and get government money and get government money) but John and Mary who tried to do the right thing and got caught in the tsunami don’t deserve help?
I understand the mortgage plan may have been the straw that broke the camel’s back and I understand that it feels a lot more personal to have the government give money to your neighbor than to your credit card company. I also understand, though, that it all looks pretty ugly from where I’m sitting. A handout is a handout whether it goes to big corporations or the guy down the street and, frankly, if you weren’t out marching in the streets when AIG or Citi or GM got their money I’m disinclined to applaud you for rushing out your door the instant someone suggests giving homeowners some of that money, too.
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All Bottom-Up Bailout posts are filed under the category “BUB”.
I worked for a major financial institution from 1990 to 2001 and were was therefore employed by such when Glass-Steagall was repealed. I believed at the time that the repeal was a mistake although I have to admit that my belief was more gut-level than intellectual. It simply seemed obvious to me that letting financial institutions get too big and do too many things was a recipe for disaster. While people who supported the repeal seemed to be arguing that agglomeration meant the losses from one type of business would be offset by gains from another, I worried about insurance losses crashing my bank or banking losses making my insurance worthless.
Then came the great financial meltdown of 2008 and some pundits began pointing the finger at deregulation, especially the Gramm-Leach-Bliley repeal of Glass-Steagall. Nonsense, replied other pundits. If anything, they claimed, the repeal of Glass-Steagall helped save at least some of the financial system enabling - for example - Bank of America to take over Merrill Lynch.
I don’t know how much the repeal of Glass-Steagall contributed to the current crisis. But I would just like to point out that both Bank of America and Citicorp* were beneficiaries of the repeal and I don’t think anyone would cite them today as shining examples of financial success. And so my gut is telling me that I was right all those years ago: the repeal of Glass-Steagall was a bad idea - although it was certainly only one bad idea among many over the last decade.
Why bring this up now? I’ve recently been reading through a lot of posts at MaxedOut Mama and ran across one that backs up my old gut feeling about Glass-Steagall (I’ve reproduced only bits and pieces - you really should read the whole thing):
... Wall Street argued with some passion and a lot of political cash that over time, the US economy was being disadvantaged by overly stringent regulation. ... I think one could fairly argue that over time, the reverse of the IB arguments were true - the regulatory constraints in our financial system prevented soaring to the heights, but over time fostered a healthy economic climate and sustained growth. ...
The result was that overall regulation was reduced, the incentives to verticalize were massive, counterparty buffers were eliminated, and within less than 10 years, the financial system imbalances that produced the Great Depression in the US had returned.
In the same post, MaxedOutMama also has a most interesting description of how things worked before and after agglomeration which demonstrates how the repeal of Glass-Steagall eliminated checks and balances that had existed earlier.
MaxedOutMama’s analysis was presaged by the October 2007 testimony of Robert Kuttner to the Committee on Financial Services of the U.S. House of Representatives, chaired by Barney Frank (via Anglachel’s Journal):
Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s -- lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. An independent source of instability is that while these credit derivatives are said to increase liquidity and serve as shock absorbers, in fact their bets are often in the same direction -- assuming perpetually rising asset prices -- so in a credit crisis they can act as net de-stabilizers.
Do read Kuttner’s entire testimony. It is a plea for intelligent regulation, reminding us that if the government is going to bail out entities it is wise for it to regulate their behavior in an attempt to avoid having to do so.
(I’m also struck by what both MaxedOutMama and Kuttner say about NRSROs (Nationally Recognized Statistical Ratings Organizations). It seems to me they dropped the ball big-time and yet I’ve read relatively little condemnation of their behavior. As Kuttner put it, “In this decade, it remains to be seen whether the bond rating agencies were corrupted by conflicts of interest, or merely incompetent.”)
So what conclusions do I draw from this other than that my gut often knows more than I do? Specifically that financial rules in place for 65 years shouldn’t be tossed aside lightly - which I suppose means I'm a conservative. Generally that hubris leads to nemesis - which I suppose means I'm a realist.
*****
*One of the theories floating around at the time was that Glass-Steagall was repealed specifically to allow Traveler’s and Citibank to merge; that they had announced their merger and dared Congress not to accommodate them.
At some point while I was away I watched a discussion on either Fox News or CNN about the stimulus bill. One of the experts being interviewed opined that there were much more stimulative measures than those contained in the bill. When asked for an example, he stated that for a trillion dollars we could simply not have anyone pay income taxes for a year. I thought that was a wonderful idea.
It will not happen, of course, for two reasons. First, as my husband pointed out, that would mean individuals would get to decide what to do with their money rather than having the government decide. An unwelcome idea in Washington and absolute anathema to this Administration. Second, the government would have a revolt on its hands when the year was up. I can just imagine how horrified and resentful people would be if they had been able to keep most of their own money for an entire year and were then faced with having to hand a significant chunk of it over to the Federal government once again.
It’s nice to dream, though.
I’m back to full Internet access and comments are re-enabled.
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