Bailout politics: Trillions in guarantees for banks, a measly few billion for distressed homeowners

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?

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Comments (4)

  1. Submitted by Tom Poe on 02/06/2009 - 03:04 pm.

    “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.”

    That’s a huge gulp of Kool Aid you’re drinking, buddy. No moratorium, and foreclosures continue unabated, despite whatever else might be going on. Declare the moratorium, and the foreclosures are halted, while officials work through who gets to stay and who doesn’t. Are you actually thinking that it’s better to throw everyone out, in order to not give a benefit of months to the “bad” ones?

    Next thing we’ll all be reading from you, is that when an artist comes to town, she brings three jobs with her is a socialist myth. Facts be you-know-what, eh?

    NBC decided Arlen Specter was the best expert to explain things this morning, and now you want to emulate his crap for logic.

  2. Submitted by dan buechler on 02/07/2009 - 11:05 am.

    Steve, I agree with you but I agree with Krugman a bit more (which really means nothing since I am just one unconnected/atomized person). I hate playing partisan politics but it is getting close to the point where you have to wonder about the patriotism and even some of the intelligence (gulp!)of the GOP. We really don’t know how to “constructively” (note) employ all our “citizens” (note) who want or need to be employed. Get yee back to retail, hospitality, and private construction. God its brutal. I read a piece where Bush etc. were pursuing low wage policy and it seems to be coming more and more true.

  3. Submitted by dan buechler on 02/07/2009 - 11:16 am.

    You gotta read and share Andrew Leonard’s take on Grover Norquist. Privately some republicans are thinking their party is insane and poorly led but there is no new vision really same old puppet masters behind the scenes. These macro economic naysayers are making the religious right look moderate.

  4. Submitted by dan buechler on 02/07/2009 - 12:47 pm.

    Perhaps I have ruptured my spleen. The party of law and order apparently wants neither. No reaching across party lines, no centrism. Maybe the large populous states should have 3 senators and a few less house members who are districted into balkanized communites. Its gerrymandered in Minnesota and we don’t even have 2 senators.

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