Paul Krugman’s spleen is so inflamed this morning that it may burst before the day is done: “Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts. It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive.”
He’s entirely correct about the Republicans. But he’s wrong insofar as he means to imply that it’s only Republicans with their tax-cut nuttery putting Democrats back on their heels. The Democrats are themselves far more inclined to give their time and attention and aid, on absurdly permissive terms, to the banks than to public/homeowner relief efforts. A week before it took office, the Obama administration began signaling its a priori surrender on any government takeover of the banking system. (Not for nothing was Obama the clear choice of Wall Streeters in last year’s election.) And the much-ballyhooed overhaul of last fall’s TARP bill by Congressional Democrats to make sure the public was protected came to precisely nothing as it turns out.
Let’s try for a sense of proportion here. Most people, I suspect, have the vague notion that bailout efforts and stimulus efforts are roughly equal because of all the media attention to the $700 billion TARP and the $800-$900 billion stimulus bill that’s now in the Senate. Not so. If you tote up all the ways the government and the Federal Reserve have thrown money at banks through TARP, the Fed’s growing balance sheet, and guarantees against future losses, the number comes to–well, no one knows what the number comes to. But when Bloomberg News tried to estimate the total last November, the figure it came up with was $7.7 trillion. That’s the ballpark number to keep in mind when comparing bailout moneys to stimulus moneys.
To be sure, there are good reasons that the financial sector piece of the puzzle is much larger and more immediately urgent. But by such a staggering margin? Let’s also remember that the mortgage crisis and the plight of distressed homeowners are hardly an incidental part of the larger problem. Even if you leave aside the social equation entirely, there are macro-economic and fiscal reasons to stabilize the housing market as much as possible. And that means steps to reduce the volume of foreclosures, whether it’s by moratorium, some form of cash subsidy, requiring lenders to offer liberal workout terms, or (as Dean Baker suggests) passing a law allowing under-water homeowners to rent their houses at market value.
And what have we gotten so far? A handful of competing proposals from Democrats and Republicans that nibble around the edges of the problem with proposals running in the $50 to $100 billion range. That’s a pathetic sum compared to the magnitude of the problem. It appears that the stimulus package still contains provisions that would let judges impose mortgage-restructuring terms; that would be a step in the right direction, but let’s see whether it survives in the final version.
It’s true that any broad-scale mortgage relief program poses serious difficulties as to how to help those in need without letting everyone pile on. But that’s no excuse for ignoring serious mortgage relief. At bottom, Democrats seem to share with Republicans a conviction that the “moral hazard” of bailouts is much greater among the lower orders than the financial elite. Certainly that’s true of the White House economic team. But what else would you expect from the spawn of Robert Rubin?