Topic: Finance, Banking & Monetary Policy

Now Is the Time to End the Mortgage Interest Deduction

If there is one, almost universal, point of agreement on drivers of the financial crisis, it is that our financial system simply had way too much leverage.  Much of that discussion has focused on financial institutions, leading many to suggest increased capital standards, so that banks have more equity and less debt.  Often lost in the mix is the excessive leverage on the part of home owners.

We know, for instance, that the number one predictor of mortgage default is whether the borrower has equity or not.  And while that should lead us to debate appropriate downpayment requirements, at least when the government backs the mortgage, we should not forget that our tax code encourages excessive leverage on the part of home buyers.  And there’s no bigger incentive to get a bigger mortgage than the mortgage interest deduction.

Some might say we can’t risk removing any props from the housing market.  My friends at the National Association of Realtors, for instance, have in the past argued that full removal would decrease home prices by up to 15 percent.  Such an estimate depends on the level of interest rates (the higher are mortgage rates, the higher the value of the deduction and the greater the impact on house prices).  With the current low level of mortgage rates, the negative price impact should be around 5 percent.

Given the already close to 30% national decline in prices, a further 5% would be less noticeable now than at a time when prices start to rise again.  In addition, a 5% decline would attract more buyers into the market.  Housing is just like any other good – when there’s too much, the best way to clear the market, perhaps the only way, is to drop prices.  Getting rid of the deduction would make housing all the more affordable.  And given current low mortgage rates,there would be far less distortions to do so now.  Of course, all of this should be done in a budget neutral manner, lowering marginal tax rates across the board, which would have its own benefits to the economy.

Obama Proposes Further Delay on Fannie & Freddie

President Obama seems to be slowly waking up to the fact that the American public has grown tired of the endless bailout of Fannie Mae and Freddie Mac.  The public has also rejected the talking point that Fannie and Freddie were simply victims of a 100 year storm in the housing market.  So what’s Obama’s response?  To ask for public comment and have public forums.

This strategy is clearly one of delaying and avoiding any reform of Fannie and Freddie while pretending to care about the issue.  Where was the public comment and forums on the Volcker rule?  Seemingly the standard is that fixing the real causes of the financial crisis should be delayed and debated while efforts like the Dodd bill, which do nothing to avoid future financial crises, should be rushed without debate or comment.

Even more disingenious is couching reform of Fannie and Freddie under the rubic of “fixing mortgage finance”.  This is no more than an attempt to take the focus away from Fannie and Freddie and shift it to “abusive lending” and other non-causes of the crisis.

This isn’t rocket science.  The role of Fannie and Freddie in the financial crisis is well understood.  The only thing missing is the willingness of Obama and Congress to stand up to the special interests and protect the taxpayer against future bailouts.

Did the IMF Deliberately Exaggerate the 2008 Financial Crisis?

This month, two vice-presidents of the Czech National Bank (CNB) have made very serious allegations against the International Monetary Fund. Below is the summary of their claims so far:

  1. Speaking to the Austrian daily newspaper Der Standard on April 2, Mojmir Hampl, the vice-president of the CNB, said that the IMF under Dominique Strauss-Kahn “wanted to expand its role in Eastern Europe and obtain new financial resources.” Hampl claimed that the IMF exaggerated problems with the financial systems in Eastern Europe. “We have always emphasized that the instability of the financial system [in 2008] was a Western European problem. That proved correct… According to a recent EU report, only nine out of 27 EU member states did not have to introduce any financial stabilization measures [during the crisis]. All nine were new [mostly Eastern European] member states.”
  2. Hampl’s claim was echoed by his colleague, CNB vice-president Miroslav Singer, in today’s edition of the Czech daily Hospodarske Noviny. According to Singer, “I cannot say nice things about the IMF’s role in the 2008 crisis.” The Financial Times, Singer continued, carried a lot of nonsensical stories about the state of the Czech financial sector prior to the crisis. Instead of dispelling those stories, the IMF produced a study about the Czech Republic based on incorrect data and then leaked it to the Financial Times.  “It is difficult to be certain… that the IMF wanted to harm the Czechs, Slovaks or Poles on purpose… More likely it was a combination of panic, lack of expertise and a desire to see problems everywhere.”

If true, these claims raise troubling questions about the incentives behind the largest increase of resources in the Fund’s history.

Could Obamacare Survive a Fiscal Crisis?

Over at Think Markets, NYU’s Mario Rizzo asks how Obamacare might be repealed. He focuses on the fiscal brawl that will occur when the Medicare cuts must be implemented. Let’s take a look at another fiscal scenario.

The Greek debt crisis is just the leading edge of a global debt crisis in developed countries. It is not Greece that matters to the rest of the European Union, but the precarious position of other highly indebted EU members: Portugal, Italy, Ireland, and Spain. Fiscally sound Germany could bail out Greece, but not all the others. A Greek default (likely if not inevitable) will fracture the EU and the contagion surely would spread to the United States.

The result will be what I call a Leninist moment. Lenin famously observed that a situation must often get worse before it can get better. He had a different idea of what better would be than do libertarians, but his insight is nonetheless correct.

The resulting fiscal crisis in the United States would finally force a serious debate over fiscal discipline. Not even eliminating all defense expenditures would close the budget gap. Could Obamacare survive the crisis?

Bernanke’s Hollow Deficit Warning

Even though I’ve been in Washington almost 25 years, I am endlessly amazed at the chutzpah of people who support higher spending and bigger government while piously lecturing the rest of us about the need to control deficits. Fed Chairman Ben Bernanke is a good (though “bad” might be a better term) example of this hypocrisy. He was an avid supporter of bailouts and so-called stimulus, yet the Washington Post reports that he is now hectoring us to be fiscally responsible:

Federal Reserve Chairman Ben S. Bernanke warned Wednesday that Americans may have to accept higher taxes or changes in cherished entitlements such as Medicare and Social Security if the nation is to avoid staggering budget deficits that threaten to choke off economic growth. “These choices are difficult, and it always seems easier to put them off – until the day they cannot be put off anymore,” Bernanke said in a speech. “But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.”

Is the Obama Mortgage Foreclosure Plan Legal?

While considerable attention has rightly focused on the failure of President Obama’s various mortgage foreclosure plans to actually lower the rate of foreclosures, few have bothered to even ask whether the plan is allowable under the TARP statute.

Alex Pollock at AEI first raised this issue during testimony before the Congressional Oversight Panel.  Alex’s point is that TARP only allows the modification of mortgages that are actually acquired by the government.  Recall the original purpose of the TARP was to buy “troubled assets.”  In managing those assets, Congress required the executive branch to come up with a plan to assist the borrowers behind those troubled assets.

Apparently unlike the Treasury department, I believe we should go back to the language of the statute in determining what it allows and doesn’t allow.  Section 110(b)(1) is quite clear:  “to the extent that the Federal property manager holds, owns, or controls mortgages, mortgage backed securities…” Nowhere else in TARP is there any other ability to establish a mortgage modification program.  In using TARP funds to pay for modifications of loans not owned by the federal government, the Obama administration is acting far outside of its legal authority under TARP.

Many, including myself, have criticized the TARP as a massive delegation of spending power from Congress to the Treasury Department.  Such delegation is, in my mind, clearly unconstitutional.  However, even within such a broad delegation, there are parameters in which Treasury must act.  Treating TARP as simply a large pot of money to spend however Treasury chooses is nothing short of illegal.

Regulation and the Knowledge Problem

Glenn Reynolds, a law professor at the University of Tennessee but better known as Instapundit, writes in the Washington Examiner that the controversy over big corporations’ reporting the impact of the new health care legislation on their tax bills illustrates the “Knowledge Problem” identified by Nobel laureate F. A. Hayek in “The Use of Knowledge in Society” and other writings. Hayek pointed out that the information needed to run an economy doesn’t exist in any one database or agency. It is scattered among millions of people and made available to others by means of the price system. Planning and regulation do away with the information embodied in prices and try to improve on market outcomes by making use of far less information.

Reynolds writes, “Recent events suggest that it’s not just the economy that regulators don’t understand well enough – it’s also their own regulations.”