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Paulson Changes His Tune (Again)

December 5, 2008 · 6 comments

When Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times,” it made for some good chuckles on late night television, but not many people seemed to pay attention. I have a feeling that will be changing.

Paulson keeps changing his mind, it seems, about how he wants to spend our money. Remember the financial institution bailout? The one where taxpayers basically handed out a big fat blank check to Paulson and his cronies? The one that set the stage for Congress now trying to be “responsible” when it comes to the Big 3 automakers?

Yeah, that one. Well, now there’s a very real possibility that some of that money will go directly towards bailing out borrowers. And according to CNN, taxpayers are a bit furious. And why wouldn’t they be? It’s the classic “not fair” scenario.

To quell the 2.3 million anticipated foreclosures in 2009, Paulson is considering a plan to buy more troubled mortgages and force mortgage rates lower. The kicker? The plan, financed by tax dollars, would only apply to those struggling with their mortgages – those who are continuing to make their payments on time will pay higher rates.

Nice, huh?

Now, don’t get me wrong. I don’t think anyone should be homeless. I don’t think anyone “deserves” to be forced out of their homes. But my husband and I, like millions of other taxpayers, made an economic decision when we bought our house. We were offered a mortgage package that was in excess of three times what we paid for our house. I’ll admit: I wanted the bigger house. I wanted a pool. And a great big fancy kitchen with Viking appliances. And at the time, my husband and I were both working at sizable law firms in Center City pulling down a considerable amount of money. We could afford it. But my husband looked at me and said, “What if something happens?” He was right (note that I’ll only utter those words infrequently).

“Something” did happen. In fact, lots of things did. It’s called life. We left our big law firms, opened a new business and eventually had three children that, for some reason, insist on eating and wearing clothes that fit. And while our disposable income dipped considerably, our mortgage payment stayed the same.

Are we lucky? Of course we are. I am typing this post from my nice (yet modest and affordable) home in Philadelphia with a hot steaming cup of coffee in hand. My children are still asleep (thank goodness) in their warm beds. I realize that we are blessed.

But I also realize that we were smart. We have made good decisions. We’ve made some bad ones, too (starting a business is not the easiest thing in the world). As a rule, though, we try to be thoughtful about how we spend our dollars and make more good decisions than bad ones.

And it’s with that understanding that I join the choruses of frustrated taxpayers who are angry over this latest proposal.

I also understand the perspective. Despite all of the media hype, most Americans are not spending blindly; they are changing their spending habits to adjust for the current economy. And although many Americans worry about losing their homes, the reality is that Bernanke says 15% of mortgages are in danger. That sounds like a huge number. But in the US, at the top end, about 75% of American families (not Americans) are homeowners. About half of American families that own homes have mortgages. And if 15% of those have mortgages under water… let’s do the math. That means, if you believe the worst case scenario, about 5% of American families with mortgages that are in danger. Is it a lot? Yes. Is it enough to justify the expenditure of gobs of taxpayer dollars? I don’t think so. And I’m not alone: there are even web sites now devoted to stopping the housing bailout.

As the economy continues to bobble, there are a number of fiscal emergencies fighting for dollars: the Big 3 automakers, jobless benefits, food stamps, health insurance. So far, none of those are getting the attention – or money – that the housing industry has managed to win.

And yes, I’ve heard the warnings about the housing market, how a mortgage fall out will bring down the entire US economy. I’m not totally convinced. Believe it or not, some economies have done well traditionally without a strong homebuyer’s market; Japan and Germany both have lower rates of home ownership than the US.

On the tax side, I’d rather see real incentives for American taxpayers to keep more of their own money. Continuing to put taxpayer dollars at risk (and yes, buying debt and loaning money for failed assets is risky) means that our national debt remains high. More borrowing means more dollars in interest paid out. The money has to come from somewhere – check your wallet. My guess is that’s where it’s coming from.

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{ 6 comments… read them below or add one }

1 MLK December 5, 2008 at 8:06 am

I agree with you that home ownership is not something that is necessary to an economically sound society. In fact, I think the tax benefits given to home owners are patently unfair (imputed rental income + deductible interest) and incentivize taking on hefty mortgages (which ends up benefiting the banks).

But… I also want to point out that although people were and are stupid when it comes to buying homes and dealing with credit, usurious practices by the credit industry are what needs to be regulated (and punished). Many people were “talked into” signing on the dotted line without understanding the obligations they were taking on. People were misled about the “value” of what they were purchasing. Buying a large home seemed like a good idea when they were told of the tax benefits coupled with the real estate “investment”. In the backs of their minds, many people believed that they would be able to sell their homes easily (and for a profit) should they lose their cushy job or fall into other financial hardship. They didn’t see themselves taking on as big an obligation as it turned out. Naive, yes. Stupid, I’m not so sure. I would draw a distinction between a person who “got taken in” by the credit industry and the person who idiotically spends beyond their means ($450 shoes, $300 jeans, $400 dinners).

Should we bail them out? If I were running things, I’d try to bail out these people by going after damages from the people in the credit industry who made money in creating the housing bubble. Financial credit agencies, brokers, mortgage lending banks. Of course, most of these companies are insolvent now, but the executives who made money could be slapped with heavy fines for their part in the scheme.

I agree that taxpayers should not be the ones responsible for bailing these people out, but I also think that these people were conned. To put the blame on them for being stupid or naive is a blame the victim attitude. They deserve justice, however, those that conned them (and not the general taxpayers) should be the ones who have to pay.

2 Kelly December 5, 2008 at 8:17 am

I agree with you that many of the lenders should be taken to task. For far too long, lenders have pushed bad practices. This applies to credit cards and mortgages. Offering extensive credit to folks who clearly can’t afford it should be prohibited (one of the articles that I read said that more than 1/3 of folks in danger of losing their homes were spending more than 50% of their income on housing) as well as usurious and “gotcha” type rates.

So I do think that these lenders, the same ones that are crying poor now, are responsible for a big chunk of this mess.

But I don’t think you can dismiss out of hand a consumer’s obligation to be responsible. When the real estate boom first started, I watched as people I knew scrambled to buy big, expensive houses and do massive renovations via refi after refi. One friend’s kitchen renovation alone cost as much as my house (I’m not kidding). When their situation changed, they had no choice but to sell their home. Another friend refi’ed her home twice in order to buy expensive cars. A colleague in Center City bought a condo and a Porsche (!) in anticipation of a promotion that never came. So while I realize that it’s not fair in every case to point fingers and say “Shame on you!”, I think there’s enough blame on lenders and borrowers to go around. And no matter which of them is to blame the most, I don’t think taxpayers should continue to dig them out. There are other economic emergencies that I think are a better use of our dollars – like jobless benefits.

3 Urbie December 5, 2008 at 9:43 am

There’s plenty of blame to go around. People are stupid, with their no-saving, overspending, buy-too-much-house-with-a-liar-loan-and-interest-only-scam mentality. Greedy lenders who set up this whole Ponzi scheme, figuring they could make money because there would always be greater fools showing up to pay more for houses. Hedge funds — basically pools of money where obscenely rich people trust their money to guys who think they can outsmart the market. Regulators looking the other way at derivatives no one (including the people who buy and sell them) can understand, allowing massive securitization of mortgages so they can’t legally be renegotiated to let borrowers stay in their homes. Oh — and while we’re at it, the auto industry, who should have seen, 35 years ago, that selling 3-ton V8-powered yachts was going to be their undoing, but refused to shape up as soon as the price of oil came back down after we used military sales to bribe the Saudis to glut the market, back in the early ’80s. Plenty of blame to go around.

Basically the whole thing amounted to people not being willing to accept market returns on their money, and becoming convinced they could beat the system and get more — more house, more income, more investment yield — than was really out there. Now that it’s all blowing up, no, it is not “fair” to bail out these stupid, greedy people. The problem is that if we don’t, we’re looking at Great Depression II. From where I sit, out of work despite two degrees and tons of marketable skills, in a state with 9.3% unemployment, things are looking worse and worse.

I’m a free-market guy — I hate to advocate government intervention in the economy. If the above people had behaved themselves and just accepted market returns, instead of trying to manufacturer artificially high returns on their money, none of this would have happened. But they didn’t, so it did. Like it or not, we’re all holding the bag.

4 Kady December 5, 2008 at 10:51 am

You do realize that bailing out mortgage holders has nothing to do w/ the mortgage holders, right? It has everything to do with the packaged securities that they turned those mortgages into. After shoving billions at the banks themselves, nothing is happening, b/c the banks were so severely undercapitalized that they are just using those dollars to fill in the holes, while their assets are still being written down b/c of the foreclosures. Paulson spent money to fill in the capitalization side of the balance sheet, now he’s trying to prop up the asset side.

I loathe Paulson.

5 Jessica December 5, 2008 at 11:05 am

I’m really not into politics or taxes or anything else thusly related to such topics. But here’s my two-cents from “average person off the street” perspective.

1. My house/condo has been in foreclosure twice in the last 3 years. No one offered to bail it out. It cost roughly $20,000 to do that when you considered taxes, missed mortgage payments, lawyers fees and whatever else they tacked on. Our house, given where we live, is cheap. It comes in around $150K. Our mortgage, 30-year fixed around 6%.
2. If you don’t read the paperwork you are stupid. Plain and simple. If you are spending potentially hundreds of thousands of dollars to buy a house, read the damn paperwork. I mean who would walk into that blindly. Don’t have any family you trust who has ever purchased a house? Or a friend? Invest and get a lawyer or something.
3. That also plays into the fact that realtors are tricky. Home builders are tricky. They want you to ignore the fine print. They upsell anything and everything about the house you are looking at. When I was looking for a home I started out looking at older homes. My real estate agent at the time (who I stopped using) told me that I shouldn’t worry about a house with sloping, cracked floors and bedrooms the size of a closet because the house had “great resale value”. Right! I’m sure it did…NOT!

Now, I get that the economy is really bad right now. Get it. The problem is that a lot of people aren’t willing to put forth the effort to save their house because they are assuming the government will step in and take care of it. Would you work your butt off? Probably not.

I have a thought that I like to live by. If you really want to have it, work for it. My significant other makes a nice salary running his own business. I’m grateful. But, I will tell you this. If his business went under tomorrow he’d be at Domino’s the next day applying for a delivery driver position. Or McDonald’s to work on crew. And while working that crappy job he’d be sending out resumes. Because a crappy job is better than no job. In fact, he’d probably get two or three crappy jobs. You are never so wonderful and fabulous that you can’t get your hands dirty. And you know what, I’m a nice little suburban stay-at-home mom, but I guarantee I wouldn’t be sitting here on my butt either.

The government should not be bailing people out of their mistakes. If they want to start bailing people out, I’ve got some credit cards and a mortgage I’d prefer to not pay too.

6 MLK December 5, 2008 at 12:18 pm

I don’t think the government should bail out people who were misled and taken advantage of by the credit industry (i.e. gov giving money to pay off their debts to the credit industry), rather, some of what they owe (say anything above 10% of the principle) should be wiped out. The problem is NOT what people spent, especially when it comes to credit cards, rather other fees such as high interest rates (constantly compounding) and hidden fees (late fees, etc).

According to the documentary Maxed Out, most people will credit card debt owe interest that is 50% of principle. That means if I bought a dress for $100, I’ll owe $150 to the credit card company. It is reasonable for the government to step in and tell the credit card company “you should not have lent her money at that interest rate. If she was so high-risk then you shouldn’t have lent her money at all. Now we will prevent you (the credit card) from charging her (the consumer) more than a reasonable amount”. In this way the government will limit my liability to (lets say) $110 (the $100 I spent on the dress and 10% interest). No other taxpayers suffer, I (the consumer) still have to pay for what I got and don’t get off scott free and the credit company gets a slap on the wrist for taking advantage with usurious practices.

That is my solution for the crisis.

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