Monday, January 23, 2017

Here Is Exactly Why We Need President Trump, Chuck Schumer

Just before the end of the Obama administration the FHA issued regs lowering the rate paid on mortgage insurance by people taking out low-down mortgages.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," said Castro.

"This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers."
First thing the Trump administration did was cancel those regs.

Next thing we have Sen. Chuck Schumer (D-NY) chiming in.
"What a terrible thing to do to American homeowners. President Trump, with the flick of a pen, ended that new policy, making it harder for Americans of modest means to obtain their piece of the rock, the American dream – home ownership," 
No, Chuck. You've got it exactly backwards.

First of all, it might have been a good idea to lower mortgage insurance rates from, say 2009-2016. Because since home prices had taken a big fall, the downside risk on low-down mortgages would not have been very great.

Second, it is clear that in the winter of 2017 the real-estate market is warming up. We really don't need to put fuel on the fire and turn the recovery into a huge real-estate boom. That would set the stage for  another bubble and another crash. Am I right, Chuck, or am I right?

Do you get my meaning, Chuck? By lowering mortgage insurance rates you Democrats were bringing more people into the market. Which means that you would be pushing up home prices. Which means that some time down the line the Fed will have to raise interest rates to stop the bubble. Which means that "working families" and minorities and women with poorly collateralized loans would lose their homes. Again.

Are you still with me, Chuck? Now is the time to reduce government subsidies, now that the housing market has recovered,and interest rates are still low. But you want to raise the subsidies. And you like the idea of scoring a cheap shot on President Trump.

Government mucking around with the mortgage market is the same as government mucking around with the price system with wage and price controls. Wage and price controls wreck the economy by wrecking the price signals that freely contracted wages and prices send to workers, employers, producers and consumers.

When government mucks around with the mortgage market by subsidizing mortgages it basically gives everyone a coupon to add to their income and balance sheet so they can bid with more money in the real-estate market. But all that does is mean that everyone can bid more. It doesn't help low-income people to get homes. It just means that low-income people can compete with each other and raise the price of homes -- and enrich the folks that already have homes.

But of course the damage goes deeper than that because the mortgage market is part of the credit system and the credit system is the very life blood of the economy.

Now, Chuck, are you still with me? If you read Walter Bagehot's classic book on the money market, Lombard Street -- and I am sure you have, being as you are the senator from Wall Street and all -- you will remember that Bagehot lays out two vital principles for the healthy functioning of the credit system.

  1. Credit should be properly collateralized so that loans can be fully liquidated if the borrower cannot pay. Otherwise people begin to doubt the soundness of improperly collateralized loans; they lose confidence, and that could lead to a panic.
  2. Borrowers need to have the income to service their loans. If a question arises about the borrower's ability to pay, then people begin to lose confidence in the institution holding the borrower's paper, and that could lead to a panic.
In good times, of course, a little bit of shaky loans isn't too much of a problem. But who cares about that? What matters is what happens during a market break when things are not looking so bright. That's when the soundness of the credit system really matters.

So it's all very well to want to help "working families" get their first home. But what's the point, Chuck, if their shaky finances and their badly collateralized loans threaten the whole credit system? As they did in the Crash of 2008. And what's the point if the "working families" lose their homes when the crash comes and they are the first to be laid off?

But here you are in 2017 and it reads like you didn't get the message from the Crash of 2008, because here you are, Chuck, demanding the injection of badly collateralized mortages and borrowers into the financial system.

Look, I get it. You Democrats, willingly assisted by your Democratic operatives with bylines in the media, put out the narrative that the crash was all the fault of greedy bankers.

Well, of course. The bankers wanted to cash in on the torrent of bad paper that government policy hosed upon the credit system. As in Fannie and Freddie. Actually, if they didn't shovel out bad loans to bad borrowers the activists and the congers-critters like you, Chuck, would demand to know the reason why.

The Crash was not the bankers' fault. It was your fault. It was your policy that flooded the world with bad paper. Because you wanted to help "working families" buy that first home.

How bad was your policy? Thanks for asking, Chuck. I just happen to have a page at my usgovernmentdebt.us which shows the growth in "Agency Debt" since World War II. Take a look at Chart D.23f, Chuck. It shows that Agency Debt (i.e., debt from outfits like Fannie and Freddie) went from zero after World War II to 50 percent of GDP just before the Crash.

So we have the official Federal Debt at about 100 percent of GDP, which everyone agrees is a Bad Thing. But then we have the Agency Debt, which is also an obligation of the Federal Government. So, if you add the two together, suddenly the total debt hits 150 percent of GDP.

And that doesn't count the unfunded liabilities of Social Security and Medicare.

Golly, geewillikins, Chuck. Do you think that the growth in Agency Debt just might have had something to do with the Crash of 2008?

Just imagine, Chuck, if you chaps hadn't hosed the economy with your cheap mortgages. Just imagine if the economy had set fair after a little wobble in 2008. Just imagine if you Democrats hadn't lost the House in 2010 and the Senate in 2014. Just imagine if you Dems hadn't run the worst politician in America for president in 2016. Just imagine if you chaps had realized the danger in the rust belt states from the white working class dying of despair.

Why, Chuck, you would be Senate Majority Leader right now and King of the World.

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