Mon Dec 10th, 2007 at 11:01:36 AM EST
A number of bloggers the past two or three days have posted diaries pointing out the many flaws of Bush's announced solution to the subprime mortgage crisis. Simply put, Bush's plan has no real muscle, leaving actions by the banks entirely voluntary; the plan helps very few of the people who are having problems with their mortgage payments; and what ever few problems do get fixed will reappear after the five-year limit of the plan is reached.
So, what is Bush trying to accomplish by proposing a plan that really does not work?
Elizabeth Warren at tpmcafe has found the answer. She quotes a CongressDaily article of a day or two ago which reports that
"the mortgage industry hopes a White House plan designed to aid subprime borrowers at risk of losing their houses will help scuttle congressional efforts to refashion mortgages through the bankruptcy code.
Warren labels the Bush proposals "The Sandbag Plan," because one banking lobbyist chortled that the Bush plan "Totally will sandbag the bankruptcy stuff," killing off any hope of real reform that will really help real people.
Warren writes that
"In a piece entitled, "Bankers Hope Bush Subprime Plan Will Scuttle House Bill," CongressDaily reports that "the mortgage industry hopes a White House plan designed to aid subprime borrowers at risk of losing their houses will help scuttle congressional efforts to refashion mortgages through the bankruptcy code. . . The announcement comes as Congress moves ahead with plans to make it easier for bankruptcy judges to refashion home mortgages that are on the verge of foreclosure -- legislation bitterly opposed by the housing industry. Bankers said they hope to use the White House approach as a prime example of why the bankruptcy legislation should not move forward, emphasizing that a voluntary effort can cover many of the estimated 2 million subprime loans that are scheduled to reset to higher rates over the next two years."
Why are the bankers so worried about the possibility of real reform of the bankruptcy laws, that they have their shill, the President, out pushing a diversion?
What's really stake at here is preserving the wins the "Economic Royalists" have gained in the past three decades of class warfare waged against the lower and middle classes, which has financialized the economy, and diverted ever more and more of the national income to corporate profits in general and the financial sector in particular.
In short, this is like Bill Kristol's infamous memo of December 2003 calling on conservatives and Republicans to not just oppose the Clinton health care plan, but to kill it, because it would "re-legitimize middle-class dependence for `security' on government spending and regulation", and "revive ... the Democrats, as the generous protector of middle-class interests."
Even Bonddad's diary yesterday, Bush's Mortgage Plan: Not Good On Several Levels missed this essential point. The real underlying problem is the destruction of wages and earnings for 80 percent of Americans. As I argued in a diary last week,
The current foreclosure crises is rooted in the stagnation of wages and earnings the past 30 years. If, since Reagan took office, average weekly earnings had continued to grow at the same rate they had grown from 1964 to 1980, the typical household in the U.S. would have had around $30,000 more in income than it does now. That's right, nearly twice the income. There would not have been a "market" for sub-prime mortgages in those circumstances, and the opportunities for predatory lending would have been almost non-existent.
A graph in a General Accounting Office report last month is very revealing: it show that the pressures for the present crisis have been building ever since Bush "took" (including the most venal use of the word) office in 2001.
The growing pressure on low and middle class incomes is clearly manifested as the steadily rising medium gray line, foreclosure starts. Especially significant is the distinct upward trend of defaults since 2001, which I have underlined in red. This is a clear indication that trouble has been brewing right under the surface of the U.S. economy for years.
(The graph, by the way, is from page 21 of a General Accounting Office report to the Committee on Financial Services of the House of Representatives, delivered October 10, 2007, Home Mortgage Defaults and Foreclosures: Recent Trends and Associated Economic and Market Developments.)
Now, I have no idea why the banks have not initiated more foreclosures while the number of clearly defaults began to rise over the past six years. Or why NOW banks ARE suddenly foreclosing the past few months. I suppose we could take off our tin-foil hats for a few moments and contemplate the possibility of some sort of financial end-game. Personally, I would not be surprised if a bunch or Wall Street types get together at their country clubs or on their yachts, and share tips for their latest rip-off schemes. And they certainly do have lobbyists hard at work making sure the government does not step in and restrain the "marketplace" that does "magic" for their bottom lines. But I think the problem is simply the fundamental shift in the economy caused by financialization.
This shift has hugely benefited Wall Street and the financial sector, and one answer to some of the problems now bubbling to the surface (such as people losing their homes) -- start re-regulating the banks and financial houses -- has to be killed aborning.
The resulting shift in how national income is distributed is clear in the following graph from the Economic Policy Institute:
The one good thing about the current subprime mortgage crisis is that it is forcing some of the players with deep pockets to actually start tallying up the costs of the economic destruction wrought by the ongoing class warfare. With the decline of working wages and the stagnation of middle class incomes, most Americans took on increasing loads of debts to keep up appearances, make ends meet, handle the expenses of medical emergencies, and / or put a child through college. While the conservatives and Republicans are dithering and debating about who "acted responsibly" and who didn't, here are the hard facts, according to financial analyst Michael Lewitt (emphasis mine):
Over the past 5 1/2 years, $1.1 trillion of equity has been extracted from American homes. This represents almost half (46 percent) of the increase in total consumer spending over the same period. In the first nine months of 2007, $219 billion was cashed out of U.S. homes according to Freddie Mac estimates, equivalent to 53 percent of the increase in personal consumption during that period. Household mortgage debt stood at $10.143 trillion at the end of the second quarter of 2007 compared with $4.295 trillion in 1999, an increase of 136 percent over six years. Mortgage debt relative to disposable personal income (the money used to service that debt) increased from 64.7 percent to 100.2 percent during this period, a 35.5 percent rise that was greater than the total increase that occurred over the 43 years leading up to 1999. The value of residential real estate also jumped during this period, but the disposable income number is the one that pays the mortgage. The presumption is that without the housing equity extraction, consumer spending growth would have been much more muted. Furthermore, consumers added to their variable cost debt burdens to finance their spending, placing themselves in a vulnerable position when rates on teaser loans increase.
Moreover, home prices remain near record highs . . . From the 2006 peak, housing prices, in inflation-adjusted terms, have declined 3.4 percent thus far in 2007 according to the Shiller Real Housing Price Index. Real house prices therefore remain 58 percent above the previous cyclical high reached in 1989 and almost 94 percent above the average real price from 1890 through 2007.
Without the massive explosion of indebtedness, the U.S. economy would not have been able to maintain the fiction of normalcy. The graph below shows what U.S. Gross Domestic Product would have been if Americans had not been able to "monetize" the rapidly rising values of their homes.
So, what happens now that the artificial stimulus of rising home prices is no longer available to mask the underlying illness of the U.S. economy? Well, Wall Street and the Economic Royalists will either have to find another asset bubble to inflate, somehow, someway, or they just might actually have to come up with a plan for financial end-game. Either way, don't expect the interests of the lower and middle classes to be taken into account: we'll keep getting nothing but "sandbag solutions" until we break the power of the Economic Royalists.