McCain's $100 Billion Giveaway

Brad DeLong notes that McCain's new mortgage plan that he proposed at the debate is a 100 billion giveaway to the "worst-behaving mortgage financiers":

John McCain's New Mortgage Plan Is Worse than I Had Imagined Possibly, Even Given What I Know About John McCain: Douglas Holtz-Eakin says, this morning:

[W]e would in fact be taking the negative equity position and putting it on the taxpayers books instead of putting it on the private lenders books or the homeowners books. We think the balance of risk has shifted to the point where this is the way to go...

What does this mean? It means that John McCain wants to give $100 billion of taxpayers' money to America's worst-behaving mortgage financiers.

Let's back up. For the past month the debate about how to deal with the collapse of the debt-trading portion of America's financial markets has been between two plans: the Paulson plan and the Elmendorf plan:

• The Paulson Plan: Have the government buy up distressed securities at market value, thus reducing the supply of high-yield debt securities that the private sector must hold. When you reduce the supply of anything you raise its price. Hence the Paulson plan's $700 billion purchases will push the prices of risky debt securities up, and so companies will then be able to sell their bonds again and so hire more workers, and depression will be averted.

• The Elmendorf Plan: Have the government directly invest in and take an equity stake in troubled banks, thus reassuring their depositors and creditors that they are sound. The banks will then be able to profit by buying up distressed securities--hence raising their prices--and by directly lending to companies that will then be able to hire more workers, and depression will be averted.

The argument for the Paulson plan was that the Elmendorf plan was socialism.

The argument for the Elmendorf plan was that it held the promise of doing a much better job of preventing depression, for each dollar committed to the Paulson plan reduces the gap between the demand and supply of distressed securities by only $1, while each dollar invested in a bank is then leveraged 8-to-1 as bank creditors and depositors are then willing to keep more money in the bank and so reduces the gap between the demand and supply of distressed securities by $8. Eight times as much bang for each federal buck, and the Elmendorf plan ensured that the taxpayers were protected to a greater extent: we did not just have the socialization of loss after the privatization of gain, we had the socialization of any gains that might occur if banks' equity values ever recovered.

The argument for passing Paulson-Dodd-Frank was:

• Time is of the essence: something needs to be done right now.
• Paulson-Dodd-Frank has sufficient flexibility that Assistant Secretary Neel Kashkari and his successors can do either Paulson or Elmendorf, at their judgment.
• The logic of the situation will over time drive Kashkari and his successors toward an Elmendorf-like solution as he deals in the markets.

Now comes John McCain with something worse than Paulson:

Ben Smith's Blog: Moral hazard: Moral hazard My colleague Victoria McGrane, late of our Capitol Hill bureau, emails with the most lucid explanation I've seen of what McCain did last night. The crucial shift from a recent congressional housing bill to McCain's more dramatic plan, she writes, was a move away from concern about moral hazard:

Details provided to reporters by senior adviser Doug Holtz-Eakin Wednesday morning make one thing clear: Taxpayers would directly pick up the tab for the difference in cost between a homeowner’s old, too-expensive mortgage and the cheaper one provided by the government... something that congressional lawmakers, led by House Financial Services Chairman Barney Frank (D-Mass.) specifically avoided when they crafted their own landmark housing bill, which passed in late August and took effect Oct. 1.

Congress’ bill – which Holtz-Eakin says provides at least part of the authority McCain would need to carry out his plan – provided a $300 billion program to help distressed borrowers refinance into cheaper Federal Housing Authority mortgages. But to participate, lenders and mortgage investors would have to reduce the mortgage principal...

Not so McCain's plan. McCain's plan is for the government to buy up $300 billion of distressed mortgages not at current market value but at full face value:

“Clearly we face the trade off that we would in fact be taking the negative equity position and putting it on the taxpayers books instead of putting it on the private lenders books or the homeowners books,” Holtz-Eakin told Politico. “We think the balance of risk has shifted to the point where this is the way to go.”

The McCain plan is:

• Take $300 billion.
• Pay double current market value to banks that have troubled mortgages on their books, thus:
  • Give a present of $100 billion to the bankers who made the loans.
  • Acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.

There's a big difference here: Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.

I would say that this is unbelievable, but I do believe it.

Comments

[pgl]

Will this be only a $100 billion giveaway? Bakho adds a comment to Brad's blog suggesting that the value of the mortgages covered may have to be much bigger which sort of fits with my query:

econospeak.blogspot.com/2008/10/mccains-expensive-mortgage-rescue-plan.html

[kthomas]

Well, he was a Keating 5 member, wasn't he? Oops, he's sorry now. He's so much smarter than "That one".

[TigerPaw]

McCain is a Republican ... isn't it their unspoken platform that the Treasury exists solely to fatten the wallets of friends, the well-to-do, and similar worthy souls?

[Barkley Rosser]

Gosh, I frankly do not think that this is a bad proposal, although of course, as pgl pointed out on econospeak, it is hypocritical of McCain to push it while bragging that he will "freeze spending." Is it not the case that the homeowners who get their mortgages bought and reissued will be paying a smaller amount afterwards? Am I wrong about that? Is so, this is one of the few proposals that more directly helps some of those endangered by all this.

OTOH, I do not think it will achieve its stated goal of "stabilizing housing prices," which almost certainly have some further way to go down.

[Patrick]

TigerPaw - too true. Remember, to many Republicans, there is a moral equivalence between material success and moral worth. In their world view the poor are poor because they are morally inferior, thus it would be wrong to reward their dissolute ways. In fact, one should be sure to put the screws to them as just punishment for the crime of poverty... It's right out of Dickens.

[rufus]

For a moment, the briefest of pauses, I think McCain deserves some credit for recognizing a problem at the heart of the current crisis, shoring up of the housing market.

However, what is ‘funny’ (not in the HaHa! sense, but in an ironic sense…okay I did chuckle as well) is that McCain would on one had criticize Obama for his comments about what ‘Government will do’ in regards to healthcare (or government investment in alternative energy) and ridicule the ‘tax and spend’ democrats, while on the other hand open the debate with a ‘big government’ solution to help stop the decline in housing prices.

This obvious contradiction shows that the McCain camp is desperate, and like many politicians willing to say anything to get elected (or stem the tide in the polls), but do they seriously believe taxpayers (aka voters) will not understand McCain’s obvious self dissonance.

[rufus]

Not to get too far off the subject, but I do think that is the most Hawkish I have seen Obama, particularly with regards to Afghanistan-Pakistan borders and Russia. While I do think McCain stated the undecided position better when confronted with the question of whether or not Russia is an Evil Empire, the last thing a democrat can afford is to appear weak on national security (ala Kerry).

Also, while this new ‘kind of democrat’ message should play well in ‘Bubblia’, it is also an example of the ‘say anything’ strategy of today’s politics. There is the Democratic stated position and the Republican stated position, and like the rest of the country, the truth lies somewhere in the middle. Sorry for the tangential subject thoughts.

[BenE]

Digg it up!:

http://digg.com/business_finance/McCain_s_100_Billion_Giveaway

[ilsm]

Freeze spending...........

Communist collaborator.

Stopped Boeing tanker lease, BUT backed Northrop contract for too large unproven tanker, because the Boeing plant would lose work and Trent Lott's PAC would bring some airplane work to Mobile where there is no workforce.

The ponies Mc Cain will buy are paid for by freezing OASDI, Medicare and Medicaid.

Won't bring our soldiers home in defeat, Mc Cain will entangle US in Georgia or Ukraine in a no win position, long supply lines and will harm German, Polish etc oil supplies.

Go ahead listen to a guy who betrayed my friends in Vietnam in 1969, who insists he is more trustworthy than "that one".

I want a pony!!!

[JimH]

This is absolutely crazy. The lenders and their agents, appraisers, and ratings agencies all were co-conspirators in lending fraud (which is very loosely regulated - anyone can be an appraiser or loan officer in most states) and now McCain wants to bail them out at the taxpayers expense?
Give them full value of the worthless paper they originated? He was quick to point a finger at Freddie and Fannie, and they certainly should take some blame, but the originators of these lending products (which Fred and Fan never did) are the real culprits. And now make THEM whole?

If you want to stabilize home prices and stimulate the economy, then I'd much rather have the government originate the loans themselves and give everyone a break. If you have 20% or more equity, let the government loan or re-fi to you at the Fed Funds rate plus a point for 10 years fixed and then adjust to the market. This gives the 80% or more of us not stuck in a negative equity position a little boost and will definitely help increase sales of new and existing homes which will clear out inventory. If you have no equity then go with the Paulson plan and if the lenders don't want to reduce principal they can take the home back in foreclosure. The borrowers can later borrow at the low rate through an FHA type of loan.

[JimH]

Yeah, I forgot about that freezing spend. McCain is all over the map with contradicting ideas. Lets stop government spending (I'm sure that won't hurt the economy and lead to layoffs), and lets give the guys who committed fraud $300 billion so they can go out and do it again. Wow! Oh and let's not forget to give another trillion to Iraq. Wouldn't want them to feel left out. It's amazing this guy has any support. I could not imagine the chaos that would follow if this kook and his dimwitted sidekick were actually elected.
The US would be the laughing stock of the world (as if we aren't already).

[Patricia Shannon]

At a time when unemployment and fuel prices are going up so much, to freeze government spending means more people will literally freeze to death this winter.

[Barkley Rosser]

Well, people can laugh all they want, but this idea comes from none other than Martin Feldstein, current frontrunner for the economics Nobel Prize according to the prediction markets. Of course, if he gets it that would be for his glorious idea that social security should be privatized because, after all, social security has caused the US savings rate to fall. How brilliant (although I note the prediction markets on the econ Nobel have been wildly wrong the last few years).

[Julio]

Trust McCain to take what's basically a good idea and foul it up...

JimH above has a much better version of the idea. I would add -- the Treasury could recover some of the investment via taxes, e.g. if a homeowner takes this option s/he would lose the cap gains exemption for that home.

[Nick]

I have been more or less a McCain proponent to date, at least in comparison to the idiocy coming from the Obama camp, but I consider myself an equal opportunity critic of stupid ideas, and this plan from McCain is right up there with the stupidest ideas I have heard coming out of empty-headed helmet-wearing retards running for office. Objectively I know Obama has proposed ideas exactly like this and much worse, but I can't get over how McCain is betraying every economic principle he claimed to stand for. He can burn in ignominy for this garbage, both the plan and sacrifice of principles, as far as I'm concerned.

[bakho]

12 million households, or 16 percent, owe more than their homes are worth, according to Moody's Economy.com.

$300 Billion would be $25,000 per mortgage on average.

A $300K house that was 75% of a bubble value ($400K) would be $100,000 under water.

I don't know how they think the math is supposed to work?

[JeffF]

Eh, McCain's spending freeze is a joke anyway because he exempts defense, an area of spending it makes obvious he wants to greatly increase. If there is any area of spending we need to freeze it is defense.

[Patricia Shannon]

With houses over-priced, the prices shouldn't be propped up.

[Michael Cain]

Yeah, and where's mine? So I paid off my mortgage several years ago. I lost equity value in the past couple of years, and if my irresponsible neighbor who has refinanced repetitively for an ever-increasing amount is going to get free equity, then I damned well want mine too.

[cent21]

Leave it to McCain to take a populist-sounding program and figure out how to implement it for the benefit of failed crony capitalists!

I guess I shouldn't crow too loudly; I more or less advocated for TARP to include something to support individual homeowners, something along the lines of a homestead act for people willing to occupy stressed homes for three years. But this sounds like the primary beneficiary is the lender, and the taxpayer covers the full cost of the failed loans.

I'm rather amazed how quickly McCain turns from one policy to another. Similar to the way he switched from a protector of offshore areas to "drill, baby, drill". I bet he saw the headline about one in six homeowners being under water, probably saw the numbers in Florida too, and had a Eureka! moment.

At least McCain doesn't pretend to understand the economy, unlike, say, Dr. Phil Graham.

[Patricia Shannon]

$10.2 trillion = 10,200,000,000,000
There are about 300,000,000 people in the U.S.
So our national debt is about $34,000 per person, and climbing.

http://news.yahoo.com/s/ap/20081009/ap_on_re_us/odd_national_debt_clock;_ylt=AtQ_UgNblwD4Hx21wn4sEjms0NUE

35 minutes ago

NEW YORK - In a sign of the times, the National Debt Clock in New York City has run out of digits to record the growing figure.

As a short-term fix, the digital dollar sign on the billboard-style clock near Times Square has been switched to a figure — the "1" in $10 trillion. It's marking the federal government's current debt at about $10.2 trillion.

The Durst Organization says it plans to update the sign next year by adding two digits. That will make it capable of tracking debt up to a quadrillion dollars.

The late Manhattan real estate developer Seymour Durst put the sign up in 1989 to call attention to what was then a $2.7 trillion debt.

[ccsail]

2 words:

civil war..

As it is the 8.4 billion BOA/Countrywide lawsuit will cause many many people to stop paying their mortgage so they qualify for the principle reduction.. This socialism is already happening with the loan modifications and is completely unfair but no one speaks up to stop it or make it available to all..

I for one refuse to pay for my neighbors mcmansion and will go to war to stop it.. That is how strong I feel about this and I would bet a good portion of this country feels this way.

The only solution is for the government to simply rent all the homes.. This would be fair for me who never got caught up in the greed and still live in a 1000 square foot house, it is fair for those underwater and behind on their payments and fair for those underwater yet are prudent and make payments every month. The government should just let these folks walk away or evict the non-payers and put them into rentals that they can afford. I believe the credit markets and the banks are pricing this in already..

[Patricia Shannon]

ccsail

I understand how you feel.
But many people lose their home because of health problems which cause large medical bills and loss of jobs.

[Jalin]

Well, I am no pro-Gop. but if you think Obama's lies are better vote for him. We see what both houses have accomplished in two years of Dem. control--Nothing