Archives: 12/2010

Advocates Complain Banks Not Putting FHA at Enough Risk

A constant narrative of the financial crisis is that banks out-smarted the government by taking excessive risks, and that if only we had empowered regulators, the whole crisis would have been avoided.  The truth, however, is that government was often the driver of excessive risk-taking, and nowhere is that more true than in the mortgage market.

One of the worst offenders has been the Federal Housing Administration (FHA).  Even today, one can get an FHA backed loan with only a 3.5% downpayment.  After the financing of seller concessions, the borrower can leave the closing table with zero, or even negative, equity.  FHA will even offer these low equity loans to subprime borrowers, those with the worst credit history.  If there’s anything to be learned from the financial crisis, combining high risk borrowers with low downpayment loans is asking for default.

Despite FHA’s loose standards, several lenders have responsibly chosen to impose higher underwriting standards than FHA.  Sadly instead of being praised for being slightly more responsible than FHA, these lenders are being attacked by so-called consumer advocates for not taking enough risk.

The Washington Post reports that a coalition of advocates is planning to file complaints against lenders who have higher standards than FHA, claiming that higher standards discriminate against minorities, since minorities on average have lower credit scores.  It seems some have learned nothing, continuing to push the very same policies that contributed to the crisis.  If anything, FHA should start moving in the direction of the more responsible lenders and improve its woefully weak underwriting standards.  Congress should also move in the direction of requiring meaningful downpayments on FHA loans, as well as shifting some of the credit risk back to the lender.

Words I Don’t Say Very Often: ‘I Applaud Senate Republicans’

Much to my surprise, Senate Republicans held firm earlier today and blocked President Obama’s soak-the-rich proposal to raise tax rates next year on investors, entrepreneurs and small business owners.

I fully expected that GOPers would fold on this issue several months ago because Democrats were using the class-warfare argument that Republicans were holding the middle class hostage in order to protect “millionaires and billionaires.” Republicans usually have a hard time fighting back against such demagoguery, and I was especially pessimistic since every Republican senator had to stay united to block Senate Democrats from pushing through Obama’s plan for higher tax rates on the so-called rich.

But the GOP surprised me earlier this year with their united opposition to higher taxes, and they stayed strong again today in blocking a bill that would raise tax rates on upper-income taxpayers. Here’s an excerpt from the New York Times.

Republicans voted unanimously against the House-passed bill, and they were joined by four Democrats — Senators Russ Feingold of Wisconsin, Joe Manchin III of West Virginia, Ben Nelson of Nebraska, and Jim Webb of Virginia — as well as by Senator Joseph I. Lieberman, independent of Connecticut. “You don’t raise taxes if your ultimate goal, if the main thing is to create jobs,” said Senator John Thune, Republican of South Dakota, echoing an argument made repeatedly by his colleagues during the floor debate. The Senate on Saturday also rejected an alternative proposal, championed by Senator Charles E. Schumer of New York, to raise the threshold at which the tax breaks would expire to $1 million. Some Democrats said that the Republicans’ opposition to that plan showed them to be siding with “millionaires and billionaires” over the middle class.

Not only did GOPers stand firm, but they were joined by five other senators (including four that have to face the voters in 2012). This presumably means Democrats will now have to compromise and agree to a plan to extend all of the 2001 and 2003 tax cuts.

At the risk of being a Pollyanna, I wonder if the politics of hate and envy is falling out of fashion. Obama’s plan for higher tax rates hopefully is now dead, but that’s just one positive indicator. It’s also interesting that both of the big “deficit reduction” plans recently unveiled, the President’s Fiscal Commission and the Domenici-Rivlin Debt Reduction Task Force Report, endorsed lower marginal tax rates - including lower tax rates for those evil rich people. Both proposals also included lots of tax increases, so the overall tax burden would be significantly higher under both plans, but it is remarkable that the beltway insiders who dominated the two panels understood the destructive impact of class-warfare tax rates. Maybe they watched this video.

It’s Too Bad We Didn’t Have a Group Like This during the Bush Administration

A pair of conservative groups founded with the help of Republican political guru Karl Rove raised more than $70 million since their inception last spring….

“After a successful 2010, we are shifting toward our goals for 2011 and beyond,” Collegio said, adding that the Crossroads duo will be “active throughout 2011 in support of a conservative, free-market legislative agenda.”

Washington Post

Eugene Robinson Thinks the Government Already Owns Your Entire Paycheck

Pulitzer Prize-winning columnist Eugene Robinson at the Washington Post complains about Republicans’ insistence that tax rates not go up next month, while they also resist more government spending:

In other words, there’s no additional money in the national coffers for the victims of the most devastating recession since the Great Depression. But to help investment bankers start the new year right, perhaps with a new Mercedes or a bit of sun in the Caribbean? Step right up, and we’ll write you a check.

No. No. No. When the government fails to raise taxes, no one “writes a check.” People who are not taxed don’t get a check from the government, they simply get to keep the money they have already earned. No check will be coming from “the national coffers” to taxpayers if tax rates are left at their current rates.

Robinson seems to think that all the money in America is “in the national coffers,” and the question for Congress is who to give it to.

Democrats, Republicans, and the Upward March of Government Spending

Writing about the meeting between President Obama and congressional leaders – where some hoped to find some agreement on taxes and spending issues – Dana Milbank quotes two skeptics:

“There’s a reason why we have Democrats and Republicans,” incoming House speaker John Boehner said at his news conference. “We believe in different things.”

“We have two parties for a reason,” Obama said a few minutes later. “There are real philosophical differences.”

No doubt there are. But it’s hard to find the differences on this chart of the upward march of government spending, handily provided by the Heritage Foundation:

To the naked eye, it looks like a pretty steady climb through the Johnson-Nixon-Ford-Carter-Reagan-Bush-Clinton years, with a bit of acceleration under Bush II and then a sharp jump in 2008 and 2009. Heritage’s color-coding refers to Congress only, so you can’t see that the slight slowdown in the Clinton years occurred under divided government. And of course the TARP and other 2008 spending was proposed and forced through by the Republican White House, even though Congress was indeed Democratic at the time.

But the bottom line is: If we have two parties for a reason, because they believe in different things, why don’t we see some real differences in the growth of federal spending?

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

Cuts, Slashes, and Savings at the Pentagon

Although the Bowles-Simpson deficit reduction commission has come up short of the 14 votes among its members that it needs to force Congress to vote up-or-down vote on implementing its recommendations, the debate over ways to cut spending will certainly continue. Of particular note is the emerging consensus that military spending cannot be held sacrosanct in the search for savings.

Over at The National Interest Online, I try to shed some light on the actual scale of the cuts proposed by various deficit reduction reports. Kim Holmes and others affiliated with the Defending Defense alliance claim that the cuts are deep, indisciminate, and dangerous. I show that the proposed cuts, even if they were to materialize, would bring U.S. military spending back to 2006 or 2007 levels, and this would still be more than we spent on average during most of the Cold War.

But the more relevant point pertains to why military spending can safely be cut, not merely in Washington’s “slower growth” terms, but in real terms; historically, military spending comes down when our perceptions of threats change.

I predict a similar scenario playing out in the next decade. As the wars in Iraq and Afghanistan draw to a close (and that should move more swiftly than currently planned), recent increases in the ground forces could be rolled back to pre-9/11 levels. Additional savings can be realized if the United States were to terminate its outdated deployments in Europe. We could also revisit the role played by U.S. troops in South Korea and Japan. The Pentagon’s civilian workforce could be cut, chiefly through attrition, and save tens of billions of dollars. Finally, tighter scrutiny over the Pentagon’s spending, beginning with an audit, would allow taxpayers to realize additional savings, while ensuring that our men and women in uniform are provided with the highest quality equipment at the lowest possible price.

You can read the rest here.