Correctly defining a problem is always the first step toward solving it. All three presidential contenders delivered major economy-themed speeches this week, but John McCain demonstrated a better understanding of the housing crisis than either of his potential Democratic opponents. His speech was short on specific policy proposals, but he declared himself open to “any and all proposals, based on their cost and benefits.”
Democrats criticized McCain’s speech for lacking specifics, displaying their fondness for laundry lists of government “solutions” to complex problems. The Democrats’ various proposals indicate that they have misdiagnosed the causes of the current crisis, attributing too much blame to “predatory lending” while absolving irresponsible borrowers who took out loans they could not afford. Conservatives needed to hear the Republican nominee present a broad and accurate overview of the crisis; the specifics can wait.
Rising home prices led lenders to lower their standards, McCain said. “Some Americans bought homes they couldn't afford,” he added, “betting that rising prices would make it easier to refinance later at more affordable rates.”
Wall Street helped inflate the housing bubble, McCain argued, by betting big on mortgage-backed securities. When housing prices started to decline and foreclosures started to rise, a widely dispersed network of investors found themselves owning a lot of questionable mortgage debt, which sent investors into a panic.
In McCain’s formulation, irresponsible lending and borrowing created the problem, and uncertainty is at the root of its spread throughout the financial community. If accurate, this diagnosis demonstrates the folly of the Democrats’ proposed cures, which would reward irresponsibility and increase uncertainty among investors.
The meat of Barack Obama’s speech consisted of defending a plan he has co-sponsored with Senate Banking, Housing and Urban Affairs Committee chairman Christopher Dodd. Dodd and House counterpart Barney Frank have proposed allowing the Federal Housing Administration to pay lenders a cash fee in exchange for writing down troubled mortgages and refinancing them through FHA at lower interest rates. Obama insisted that the Frank-Dodd plan is not a bailout for lenders and borrowers who gambled on home prices. If putting taxpayers on the hook for billions of dollars’ worth of the riskiest loans isn’t a bailout, we’re not sure what is.
The Frank-Dodd plan would also reduce the size of the down payment needed to qualify for future FHA loans. Statistically, borrowers with little to no equity in their homes walk away from their loans more often. Thus, the Frank-Dodd approach, which Hillary Clinton also supports, would provide a taxpayer-insured bailout now
and increase the likelihood of future mortgage defaults.
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