Open Forum (8/1- )

By Dave Fratello | August 1st, 2011
Prompted by our Sunday paper, let's talk big picture a moment.

The response to the housing crash has been all Wall Street, and no Main Street.

Foreclosures are but a symptom of a more pervasive problem – nationally, of course, not in MB – which is that far too much money is owed against houses that aren't worth nearly what they were once worth, and maybe never will be again. (If you're in a hole underwater, stop digging stop paying.)

Of course, Washington, D.C., tried to intervene. They're so good at these things.

Helping homeowners afford their overpriced mortgages: Well, that's been halfhearted.

Helping banks & investors put off the day of reckoning for their incredible overleverging: Now that's been full-on.

But if we really want to solve the fundamental problems caused by the last housing bubble, we should punish the guilty. Cram down the banks, making them eat the lost equity in housing across the U.S. Meanwhile, release tens of millions of individual homeowners from trillions in debt, and wrestle with the consequences after that.

Michael Moore, thank you for your guest post. 

No, wait – where did we just see this argument? From the Manhattan Institute's Nicole Gelinas, in Sunday's LA Times. (See: "Let the free market pop the bubble.")

Let's just say that the number of times Mr. Moore and the Manhattan Institute have previously seen see eye-to-eye is: roughly zero. They're free-marketeers. The Institute was lauded 5 years ago by W for its "pro-growth economic policies – policies that really send a clear signal that we are still the land of dreamers and doers and risk-takers."

To which Ms. Gelinas is now saying, essentially, capitalism is only capitalism if the risk-takers who fail must fall on their swords. So cram down the lenders who got us into this mess.

What a fine position to take from an ivory tower in New York City. 

Gelinas does bring it closer to (our) home, though. She cites estimates that 2.1 million California homeowners owe $196 billion more than their homes are currently worth – a figure that grows to $225 billion with a modest 5% further slip in home prices. This "deadweight debt" isn't helping to build anything, it's just the pounding hangover from the bubble years. Write it off, and Californians would have $12 billion or more to spend on the real economy each year instead.

Instead of pushing such radical, liberating notions, Gelinas notes, policy makers have created a vast bed of feathers and marshmallows for Wall Street to land on, tried to apply the brakes to natural market forces and have wound up postponing, not preventing, the pain of the housing bubble's pop. (You thought housing had already bottomed out? TBD.)

Cue Gelinas: "If President Obama won't say so, one of his White House rivals should seize the moment."

Right. We'll let you know when one of the Republican candidates for president urges a trillion-dollar equity writeoff being forced on the big banks. Maybe the same guy – or gal – will also "seize the moment" to call for abolishing the mortgage interest deduction as part of a federal budget solution. Any European socialists in the GOP queue?


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