[NYTr] Krugman: Paulson's Priorities

[All the News That Doesn't Fit]

sent by Ed Pearl

The New York Times - Dec 10, 2007
http://www.nytimes.com/2007/12/10/opinion/10krugman.html

Henry Paulson's Priorities

By PAUL KRUGMAN

By Bush administration standards, Henry Paulson, the Treasury secretary, is
a good guy. He isn’t conspicuously incompetent; and he isn’t trying to
mislead us into war, justify torture or protect corrupt contractors.

But Mr. Paulson’s actions reflect the priorities of the administration he
serves. And that, ultimately, is what’s wrong with the mortgage relief plan
he unveiled last week.

The plan is, as a Times editorial put it yesterday, “too little, too late
and too voluntary.” But from the administration’s point of view these
failings aren’t bugs, they’re features.

In fact, there’s a growing consensus among financial observers that the
Paulson plan isn’t mainly intended to achieve real results. The point is,
instead, to create the appearance of action, thereby undercutting political
support for actual attempts to help families in trouble.

In particular, the Paulson plan is probably an attempt to take the wind out
of Barney Frank’s sails. Mr. Frank, the Democratic chairman of the House
Financial Services Committee, has sponsored legislation that would give
judges in bankruptcy cases the ability to rewrite mortgage loan terms. But
“Bankers Hope Bush Subprime Plan Will Scuttle House Bill,” as a headline in
CongressDaily put it.

As Elizabeth Warren, the Harvard bankruptcy expert, puts it, “The
administration’s subprime mortgage plan is the bank lobby’s dream.” Given
the Bush record, that should come as no surprise.

There are, in fact, three distinct concerns associated with the rising tide
of foreclosures in America.

One is financial stability: as banks and other institutions take huge losses
on their mortgage-related investments, the financial system as a whole is
getting wobbly.

Another is human suffering: hundreds of thousands, and probably millions, of
American families will lose their homes.

Finally, there’s injustice: the subprime boom involved predatory lending —
high-interest loans foisted on borrowers who qualified for lower rates — on
an epic scale. The Wall Street Journal found that more than 55 percent of
subprime loans made at the height of the housing bubble “went to people with
credit scores high enough to often qualify for conventional loans with far
better terms.”

And in a declining housing market, these victims are stuck, unable to
refinance.

So there are three problems. But Mr. Paulson’s plan — or, to use its
official name, the Hope Now Alliance plan — is entirely focused on reducing
investor losses. Any minor relief it might provide to troubled borrowers is
clearly incidental. And it is does nothing for the victims of predatory
lending.

The plan sets voluntary guidelines under which some, but only some,
borrowers whose mortgage payments are set to rise may get temporary relief.

This is supposed to help investors, because foreclosing on a house is
expensive: there are big legal fees, and the house normally sells for less
than the value of the mortgage. “Foreclosure is to no one’s benefit,” said
Mr. Paulson in a White House interactive forum. “I’ve heard estimates that
mortgage investors lose 40 to 50 percent on their investment if it goes into
foreclosure.”

But won’t the borrowers gain, too? Not if the planners can help it. Relief
is restricted to borrowers whose mortgage debt is at least 97 percent of the
house’s value — which means that in many, perhaps most, cases those who get
debt relief will be borrowers who owe more than their house is worth. These
people would be nearly as well off in financial terms if they simply walked
away.

And what about people with good credit who were misled into bad mortgage
deals, who should have been steered to loans with better terms? They get
nothing: the Paulson plan specifically excludes borrowers with good credit
scores. In fact, the plan actually provides an incentive for some people to
miss debt payments, because that would make them look like bad credit risks
and eligible for relief.

Now, Mr. Paulson’s attempt to help investors, while doing little or nothing
for distressed and defrauded borrowers, might make sense if his plan would
reduce investor losses enough to seriously improve the overall financial
situation.

But only a small fraction of subprime borrowers will qualify for relief, and
many of these borrowers will eventually face foreclosure anyway. So the plan
is unlikely to reduce overall mortgage-related losses by more than a few
percent, at most — not enough to make any real difference to financial
stability. Indeed, interest-rate spreads that have been signaling a crisis
of confidence in the financial system didn’t narrow at all when the plan was
announced.

Still, you might say that the Paulson plan is better than nothing. But the
relevant alternative isn’t nothing; it’s a plan that — like Barney Frank’s
proposal — would actually help working families. And that’s what the
administration is trying to avoid.