Irresponsible Times

With the economy still next to the cliff, there are many who offer prescriptions for what ought to be done to move us towards a steady recovery that actually produces good jobs and rising incomes for Americans. In today's New York Times, David Leonhardt offers his solutions. To put it mildly, Leonhardt's solutions are irresponsible at best and downright dangerous at worst.

First, Leonhardt wants the Federal Reserve to extend QE2, its policy of printing money to buy federal bonds. Actually, QE2 should be called the monetization of the debt since that, in fact, is what it actully is. The government needs money, so the fed prints it and then lends it to the treasury. It is nothing more than creating money out of thin air. This type of irresponsible behavior is likely to cause the rise of inflation and the collapse of the dollar once its full effect is felt. Certainly, under normal economic theory, inflation and collapse of the currency are the predicted results. Since this has not really happened yet in a big way, leonhardt reasons that it will never happen. Accordingly he calls for more of the same into the future.

Let's put it this way: If you drive your car at 100 miles per hour on icy streets, you may not crash and you may get to your destination more quickly than if you drove in a safe manner. But if a columnist in the NY Times called for a lot more driving at unsafe speeds on icy roads, everyone would know that he was not only irresponsible but also idiotic. Well, calling for more of QE2 is basically the same thing.

Second, Leonhardt wants Obama to open the strategic petroleum reserve to keep oil prices down. Wow! That too is crazy. Opening the reserve will just increase supply by a bit. Indeed, the reserve would increase supply by less than the amount of production lost when Obama placed his never ending drilling moratorium in the Gulf of Mexico. Maybe the correct action would be to once again permit drilling in the Gulf rather than selling the strategic reserve. The whole point of the reserve is to guarantee that the USA has oil to get by if there is a disruption in the world oil flow. Its use is meant for purposes of national defense, not purposes of re-electing Obama.

Third, Leonhardt wants obama to act to reduce home foreclosures. Leonhardt suggests getting banks and homeowners to mediate instead of litigating foreclosures. Even viewed charitably, that makes no sense. If the homeowner can make his payments, then there is no need for mediation. he has to pay back the money that he borrowed. If the homeowner cannot make his payments, then there is no need for mediation. The homeowner has breached his obligation to pay and the bank forecloses. Leonhardt seems to be suggesting that the banks somehow reduce the size of the mortgages on the homes, reduce the payments and let the same folks stay in the houses. The problem with this, of course, is that most of these folks cannot make the lower payments either. So after a full mediation and all that new paperwork, the home will go back into foreclosure at a lower mortgage amount when the homeowner again defaults.

Fourth, Leonhardt wants Obama to come out strongly against any further cuts in government spending. Once again, in typical liberal fashion, specific cuts are not discussed. Instead, we are told that any cuts will hurt the economy. Really? Suppose that the 86 teacher training programs run cy the feds were amalgamated into five programs. These five could give produce the same amount of training for teachers, but the overhead and bureaucracy could be cut to save billions. leonhardt argues that such waste is good for the country because it keeps the unnecessary bureacrats working. Under this reasoning, it might make sense for the government to require every private employer to hire an additional employee for ever three now on e the payrolls. Who cares if there is no work for them? Who cares if there is no money to pay them? After all, we need jobs. Even if these new jobs lead to the destruction of the remainder of the American economy, that does not matter to Leonhardt.

I hope that some day someone explains the market and economics to Leonhardt. Maybe then he could write economic articles that actually make sense.

UPDATE: After I posted this, I received an e-mail from Steve Brill who has the following comment about having the banks reduce mortgage principal that I think should be added:



“If a homeowner could make a lower payment, it still is not a reasonable solution. It would reward precisely those who borrowed too much or just chose to default, while giving nothing to those who borrowed responsibly and made all their payments on time. The latter don’t deserve a windfall, but neither do the former. What incentive would we be giving for people to be responsible and pay off their debt, if precisely those and only those who were irresponsible are to be rewarded? If particular banks abused the foreclosure process, they need to be fined appropriately. The few homeowners who were wrongly foreclosed upon and thereby damaged, should be fully compensated by whoever was at fault. But those who chose not to pay because their house didn’t increase in value as they expected it would, or took on more debt than they could handle, or just chose not to pay, are entitled to nothing.

If in order to reduce foreclosures, the Government wants to encourage banks to reduce principal voluntarily in consideration for an equity position in the house, a share of any future appreciation or some other fair consideration down the road, that would be fair and constructive. Fewer foreclosures would help the housing market by reducing distress sales and allowing the normal supply and demand market to take hold sooner. However, giving windfalls to defaulters is not only unfair, but would ultimately be counter-productive to the indisputable goal of putting into place a healthy mortgage market for decades to come”.