The Housing Bill and the House Hank Helped Build

If you're trying to talk an insane person off a ledge, you're going to do everything you can to calm them down and get them to come inside. You're not going to remind them that, well, their life does kind of suck and they have to take more responsibility for the mess they find themselves in. That would not be a good idea.

When you have an economic mess like the one we're in now--falling housing prices, a credit crunch, unstable capital markets, and whacked-out energy prices--you need a big cup of calm. And the housing bill that passed the House of Representatives this week should provide some chamomile tea (if not Xanax) for a jittery economy.

It's not a great bill. The conservatives are right that there's a lot of pork in it. And it doesn't fix Fannie and Freddie in the long term, even if it provides more regulation. But the bill should help ease stress in the housing markets and, more importantly, if it hadn't passed the guy on the ledge might have jumped. The consequences of not coming up with some kind of housing bill would have been far worse. Yes, the housing bill leaves the taxpayers on the hook for a Fannie and Freddie bailout, but that was true before the mess anyway.

I've been critical of Hank Paulson. I thought his blueprint for reform of financial regulators was too timid and that he was still too wedded to a pre-mess mind-set of deregulation. But he's been flexible, and he understood the importance of getting a housing bill through and seems, according to the White House, to have been responsible for President Bush agreeing to drop his opposition to the measure. It probably doesn't hurt that former Goldman man Josh Bolten is still White House Chief of Staff.

Over lunch yesterday with a mergers-and-acquisitions lawyer, we were speculating about what kind of mess we'd be in if John Snow or Paul O'Neill were somehow still Treasury secretary. We pictured soup lines, Busby Berkeley musicals, and Hoovervilles. Paulson may have struck out at some of the big things he wanted to do--namely, getting the Chinese to move more aggressively on the yuan and taming U.S. entitlements. But at least he's shown a willingness to respond to this rolling financial mess. I don't share his view that Fannie and Freddie have to remain shareholder-owned companies with such a pivotal role in housing, but he was right to get out in front of the cameras a couple of Sundays ago and state what everyone knew: that the federal government stood behind these hybrids.

When the Goldman giant took over at Treasury a couple of years ago, he surely didn't foresee that he'd be in the business of trying to talk crazy people off the ledge, but that's where he's ended up and, so far at least, we're all still here.

Caption: President Bush in the Oval Office with Treasury Secretary Hank Paulson on January 17, 2008. Photo by Joyce N. Boghosian/White House/AP.

Comments

[HARM:]

<i>"I don't share his view that Fannie and Freddie have to remain shareholder-owned companies"</i>

Riddle me this: why does the U.S. "need" to have 2 giant quasi-private monopolies with a taxpayer backstop? Did nobody build or sell houses before 1938? Are we to believe that private banks will never risk their own money under *any* circumstances?

Give me a break. If the banks suddenly had to risk their own money, they would still lend. However, they would also raise interest rates (to compensate for risk), carefully scrutinize borrower finances, refuse to make liar loans, and demand a substantial down-payment. Just like it was back in the day before Phonie & Fraudie. Which, of course, would cause prices to fall to TRULY affordable levels, based on local incomes and rents.

How is true affordability (not the fake debt-based $hit Wall Street has been selling us for the last decade+) a bad thing? Funny how the GSEs monstrous growth over the last decade nicely parallels the rise in house prices and UN-affordability.

I say, let 'em fail --the sooner the better.

2008 Jul 24 06:21 PM

[Oleg M:]

You sir, are a moron, with capital M. Where does the notion that someone should ease the pain in the housing market comes from? What has the housing market done to deserve such a special treatment?

This housing 'market' should get destroyed outright and houses should be priced what people are willing to pay for them.

Let's quickly recap for the uneducated:
-Appraisals were BS
-Many people's stated income was BS
--in fact, banks were pushing people to state higher income.
-Bond insurers never bothered to do any due dilligence
-Credit agencies gave bogus AAA rating to bonds on mortgage pools where a person can choose to add interest to their principal.
--Gave BBB rating to bonds of subprime mortgage pools that were clearly toxic waste.
On and on. Arguably, 2/3 of house prices is BS on BS on BS on BS. House prices should return to their fair value. People who are earning $8 per hour will not be able to afford $700K house. There's a nice tool called calculator that can help you navigate through the trouble. Use it!

If it means that C,BAC,LEH are going belly up - so be it. They are not that important. Let's review the foundation of their core businesses. It all boils down to using up future earning power today. Transferring wealth from the future to today. Except, about a decade ago they started messing up - instead of transferring future wealth into today's investments, they started transferring future wealth into today's consumption. I'm not against banks, or ibanks - it can be a great business, but the type of crap that's been pulled off recently is borderline criminal to being with. And the government is asking taxpayers to prop up - whatever that means - shitty mortgage pools because we cannot let housing industry fail? BS!

2008 Jul 24 09:19 PM

[Charlie Str...:]

The only good thing that can be said for Treasury Secretary Hank Paulson is that he speaks in plain English unlike the nefarious and serial bubble inflator named Alan Greenspan. Otherwise, Paulson is incompetent just like the rest of the government.

Disclosure - still short U.S. home prices.

2008 Jul 24 10:07 PM

[bbzz24:]

Well,
Either if you want to hear it or not but housing cannot be affordable to the present 70% of households when the average income per household is about 33k. F&F were created to buy the junk from banks and free their capital for more lending. There is clear maral hazard issue here, just knowing that you can offload your loan as soon as you make it. That purpose they served well. Now it seems that their 'business model' is not viable: they are doomed to go bust one day or another if not bailed out.

Homie Hank is just trying to bail out his comrades at investment banks as further asset deflation would lead to more writedowns and equity destruction. Does he care about the taxpayer? No. Otherwise he would not stick it to the folk.

2008 Jul 25 01:45 AM

[pochovilla:]

Sometimes you just need to push the person off the ledge. It's faster cheaper and frees up your time for more productive activities.

2008 Jul 25 05:20 AM

[BigBagel:]

I think its great how I ( the US taxpayer) get to make interest free loans in the form of the housing bill's tax credit for first time home buyers. I think this program should be expanded to other things: hot tubs, flat screen TV's, power boats, cosmetic surgery, yoga lessons. Why stop at homes? Mr. Cooper, the sane people are on the ledge. The ones who think its business as usual are the crazies.

2008 Jul 25 07:42 AM