Banking Law

It may be time to pull out the figure skates and do a "Hamill camel" in Hell: the editorial boards of The Washington Post and The Wall Street Journal agree on legislative policy. Well, not really, but at least they both agree that one piece of legislation is a piece of trash.

A couple of months ago, The Wall Street Journal ran an editorial (discussed here) that flayed Barney Frank's mortgagor/mortgagee bailout proposal. A couple of weeks ago a hole was rent in the fabric of the universe when the Wapo  ran its own smack-down of the same legislation in the form of an editorial entitled "Holes in the Roof."

The WSJ objected strenuously that the risk of further housing price declines is being shifted to the American taxpayer and that borrowers who are in many cases hardly "victims" of anything other than their own greed and/or poor judgment are being bailed out instead of being permitted to suffer the natural consequences of their acts and omissions (the "moral hazard" argument). The Wapo agrees with the "moral hazard" argument, but apparently believes that the "systemic risk" to the larger economy posed by further housing price declines has to be balanced against that hazard.

HOUSE FINANCIAL Services Committee Chairman Barney Frank (D-Mass.) has acutely summarized both the "systemic risk" posed by the housing market's decline and the "moral hazard" posed by a government fix: "The economy has been taken hostage by people that took some very bad decisions," Mr. Frank said. "The answer is to pay as little ransom as possible to the least ill-deserving people we can find."

But can he get that calculation right?

[...]

...[W]e agree that preventing further damage to the economy is a valid reason to consider a bailout.

Still, we have our doubts. Economists forecast about 1.4 million foreclosures this year. The CBO estimates that Mr. Frank's bill would help about 100,000 borrowers a year over five years -- some of whom would eventually default again. Even if Mr. Frank has selected "the least ill-deserving" homeowners, some of their neighbors who did not live beyond their means are bound to ask, reasonably, why their taxes should help out the less provident and their lenders. Or they might demand the same deal. It won't be easy for Congress to tell them no.

In terms of systemic risk avoided, the bill may be oversold. Mr. Frank's program is voluntary, and, while banks might find it an attractive way to shift their worst credit risks to the government, owners of mortgage-backed securities are hardly clamoring to take him up on it. There's almost nothing in it for the holders of securities backed by second liens, a common feature of subprime loans. To be sure, the more home prices drop, the more lenders would participate, but that would leave the U.S. government on the hook for shakier loans, thus driving up the program's eventual cost.

The Dodd-Shelby compromise in the Senate that uses FNMA and FHLMC to bail out both borrowers and lenders also gets a cold shoulder from the Wapo.

The compromise they are discussing -- paying for the homeowner bailout by taking Fannie Mae and Freddie Mac funds set aside for low-income housing -- raises a serious fairness problem, too. No doubt the sprawling, subsidy-riddled housing market is in a lot of trouble. So far, it's less certain that Congress can figure out a way to fine-tune it.

That's a different concern than any expressed by the WSJ, which isn't surprising. After all, the Wapo is as much a  left-wing rag as the WSJ is a right-wing rag. Of course the Wapo is going to worry about the possible impact of any bailout on those poor people who need federal housing funds and who did not participate in the subprime mess, and of course the WSJ is going to worry more about the impact of the bailout on those people who pay most of the taxes (in other words, the people who read the WSJ). The Wapo has a legitimate concern; however, we all know that Congress always makes sure to take care of the pork barrel and the special interests before the poor, so you can expect that if it isn't Barney's bailout that diverts the funds from low-income housing, it will be something else.

Unlike the Wapo, the WSJ editorial doesn't even mention "systemic risk," but perhaps it believes that if 42 million mortgage borrowers out of the 46 million tracked by the Mortgage Bankers Association are paying their mortgages on time, then the risk of a general economic meltdown and, therefore, a need to bail out the delinquent, is not substantial. Moreover, the WSJ may believe that whatever pain is suffered by the economy generally is something that ought to be suffered as part of the natural order of things, and that the markets will correct themselves without the deft fine tuning of Congress. I don't know.

As a practical matter, neither newspaper believes that the legislation will have enough impact on enough borrowers and lenders to accomplish its purported goals. That alone ought to derail it eventually, or at least give the president some election year spine and permit him to hold to his vow to veto such legislation if the Senate and House manage to pass a compromise version acceptable to both and send it to him for his signature. Unfortunately, the White House has been making slight mewling noises about possibly "looking at" some version of a bailout, and if the political calculation is that the Republicans will harm themselves by a presidential veto, "The Decider" might decide to back down.

Regardless of the outcome, however, it's nice to see people of such divergent political opinions reach out across the great cultural divide and come together in peaceful harmony of compromise and agreement in principle, even if it's for the purpose of mercilessly beating the crap out of Barney Frank's pet puppy.