President John F. Kennedy spoke to this when he said (and someone said it before him), "It's true. Life is not fair. Some men go to war, and others remain at home. Among those who go to war, some men are sent to the front lines, while others stay behind. It's true. Life is not fair."
Still, although each age has seen its share of formidable economic problems, the scope, seriousness, and systemic impact of economic problems facing the new president, be it Democrat Barack Obama or Republican John McCain, may represent the biggest economic decisions since those President Franklin D. Roosevelt confronted upon taking office in the depths of the Great Depression in 1933.
What's one issue likely to give the president more gray hair? The kinds of systemic reforms to lobby for, on the heels of the federal housing bailout of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) following the collapse of the housing market and rise in mortgage defaults, said economist David H. Wang. The housing bailout will further increase the U.S Government's annual budget deficit, which is expected to reach $490 billion in Fiscal 2009, Wang said.
Au revoir 'heads I win, tails you lose'?
Further, as BloggingStocks Peter Cohan has pointed out on several occasions, the housing bill represents the socialization of risk in a very large swath of economic activity -- the socialization of risk after an incorrect investment calculation by private banks and mortgage lenders. Also, at this juncture, no one, with 100% certainty, can put a dollar figure on the ultimate cost of that intervention to the taxpayer: it could be $50 billion, or $500 billion, or even considerably more.
Economist Wang argues that voters/taxpayers may begin to ask, "since we're socializing the risk, what's the gain for us? Where's the reward?" The aforementioned are legitimate questions, in Wang's interpretation.
"The housing bailout issue has the potential to critically review the whole risk/reward system relating to mortgages and banks / mortgage lenders. The public may very well want to know why are we perpetuating a system in which good mortgages mean banks and mortgage companies win, but bad mortgages mean the taxpayer pays?" Wang asked. "The public may ask the new president 'What's in it for us? And how come we're not sharing in the rewards, in the upside?' "
"Bank lobbyists may counter with, 'Well, we're writing mortgages that enable millions to buy their first homes,' but my sense is that won't be enough of a reward for the public, given the size of the bailout and its ultimate cost to taxpayers," Wang said. "They're going to want something more, from a financial standpoint."
Still, Wang is quick to point out that that "something more" would represent a formidable economic task for the new president -- one where powerful lobbies will work to stop it -- because it implies enormous economic change, "perhaps the biggest economic change since the start of FDR's New Deal programs in the 1930s."
Further, the above, combined with the U.S.'s other economic problems and a crowded international plate, means that mortgage risk reform will have to compete with other pressing issues vying for the new president's attention. But Wang still sees mortgage risk reform up ahead.
"I think it will become increasingly clear that, once the American people grasp the size of the cost they will pay for the housing bailout, the pressure will be on the new president and Congress to institute reforms that grant the public more rewards," Wang said. "Keeping deserving families in their homes will not be enough."
Economic Analysis: On to economist Wang's analysis we'll add that, in addition to who is elected president, reforms aimed at increasing the public's return on the mortgage bill it's paying for will also depend on the composition of the new U.S. Congress. A Republican Party-led Congress will probably block public-oriented solutions; a Democratic Party-led Congress, more likely to favor public-oriented reforms.
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Reader Comments (Page 1 of 1)
7-30-2008 @ 6:37PM
mauriciolopezsr said...
Everybody has something to say about this horrendous mess; however, NOBODY seems to remember that Chairman Greenspan went to Congress repeatedly and ask that they control the Mortgage Industry; but nothing was done!!!
What we need is to go back in time and don't change the Mortgage Industry but rather change our form of Government which is always going from BAD to Worst!! and go back to the basic form of government of the Ancient civilizations: ARISTOCRATIC GOVERNMENTS!! All the Candidates are resorting to the Present day Aristocrats: Warren Buffet, Bill Gates, Etc for advise anyways; cut the middle guy: The Corrupt Politician and get the real deal and Elect Bill Gates for president!!
7-30-2008 @ 7:53PM
william lindblad said...
Mauri - I am a little ticked off also, but I don't think that we need to change the form of government. I feel that was more an opportunity for some sarcasim, but I agree with you on the culprit. I have been putting the blame square with Barney Franks & co. all along. They were the only ones with the power to regulate and they only thing that they regulated were there their bowel movements. Every member of that committee that is up for election should get the axe come November. The system is not broken - the oversight was. The system worked from 1934 to 1988 without much of a hitch. 1988 was a period of expanison and greed that brought about the RTC - that was the warning. That was 1990-91 and it did quite a bit of damage to the economy, but nothng like we can expect today. I agree with Mr. Wang that we reward bad moves on the part of the banking system, but since we are straddled with foreign debt - we have no choice. Either way the txpayer loses. If we let them go on their merry way the whole country will go bankrupt and we will be in the middle of a depression that will make 1930 look like a picnic. So, bailout is the only way to prevent this. Hindsight is 100% and the mistakes are already made. The foresight is to get rid of all in Congress that were party to this mess and when newly elected and responsive politico's seat themselves - get rid of all at the top of the regulatory agencies.
If the public does not take heed and get a Congress that supports their interests - not the interests of the PAC's and lobbists - we are lost, and it will be our own fault.
7-31-2008 @ 7:45PM
winslow said...
We need major changes in government. The present form of government, Corporatism, has eroded the middle class. Every law passed needs to pass this criteria: "Will this advance or help the average, middle-class citizen?"
1) Every loop-hole that has been enacted must be closed.
2) The US is mired in uncontrollable debt. A 5 yr moratorium on speding is required plus drastic cutting of most present programs. Of course, this will keep us in reccession or depression during this time. Without such a measure, the US, as we know it, is doomed.