Thursday, October 9, 2008

McCain’s Mortgage Subsidy: Incidence to Homeowners or to Bankers?

Mike Allen reports:

Sen. John McCain (R-Ariz.) made an overnight change in the homeowner bailout he proposed at Tuesday’s presidential debate, making it more generous to financial institutions and more costly for taxpayers. McCain's staff says it was always meant that way. When McCain sprung his surprise idea at the start of the debate in Nashville, his campaign posted details online of his American Homeownership Resurgence Plan, which would direct the government to buy up bad home mortgages, allowing strapped people to keep their property. The document posted and e-mailed by the McCain campaign on Tuesday night says at the end of its first full paragraph: “Lenders in these cases must recognize the loss that they’ve already suffered.” So the government would buy the mortgages at a discounted rate, reflecting the declining value of the mortgage paper. But when McCain reissued the document on Wednesday, that sentence was missing, to the dismay of many conservatives. That would mean the U.S. would pay face value for the troubled documents, which was the main reason Sen. Barack Obama (D-Ill.) gave for opposing the plan. A McCain campaign official explained the change: “That language was mistakenly included in the initial draft and it’s been corrected. It doesn’t reflect the intentions of the initiative, which necessitated the correction and the removal of the sentence. A simple mistake.” Obama Campaign Economic Policy Director Jason Furman said in the campaign statement opposing McCain's plan: "John McCain wants the government to massively overpay for mortgages in a plan that would guarantee taxpayers lose money, and put them at risk of losing even more if home values don’t recover. The biggest beneficiaries of this plan will be the same financial institutions that got us into this mess, some of whom even committed fraud."

When I posted this, Barkley suggested that the McCain proposal wasn’t quite so bad. He – like me – was assuming that most of the incidence of this subsidy would go to homeowners. Brad DeLong, however, seems to be saying that most of this subsidy would go “to the shareholders and managers of banks with troubled assets”. If that’s the case, I agree that this is a really bad proposal.

4 comments: said...

There does seem to be a great deal of confusion about what the plan is, and I noted in all my comments on this that what it actually is does matter as to whether it is worthwhile or not. More generally, the inability of the McCain campaign to be clear about what this proposal is constitutes further evidence, if any was needed, of their general incompetence.

Anonymous said...

Isn't confusion and obfuscation a genrally accepted aspect of political campaign rhetoric that promises to cure significant ills?
McCain is beginning to sound more and more like a car salesman. Wouldja vote for me if this? Wouldja vote for me if that? What I offer may be the other, but it's cetainly not what you think it is. What is the right thing to do is what I think that you think that I think is the right thing to do.

jamzo said...

the mccain campaign knowlingly presented the plan as homeowner-advantageous

this was done to buy a big piece of the daily media narrative on the campaing, think of it as "john mccain the populist and folk hero

the restatement was done to clarify their position and to keep their place in the media narrative alive, john mccain the leader is in the thick of trying to resolve the financial crisis

the foremost mccain strategy is always try to grab the lion's share of media narrative "air time"

the campaign managers have described this on numerous occasions

Anonymous said...

So let me get this straight. Based on the idea that housing prices never fall:
- the banks go out and make risky loans using predatory lending tactics, and package them into mortgage-backed securities, which they sell for a fat profit

- Wall Street buys the mortgage-backed securities and re-sells them at another fat mark-up

- the bond insurers sell cheap insurance because "there's almost no risk.

Comes the day the bubble bursts - we can't let bankruptcy judges re-write the home loans, because the heavily-leveraged players would have to give up all those fat profits... which they've paid out in bonuses rather than retained as a hedge against bad times. Instead, we force the responsible people who stayed out of the gold rush to buy the paper at its artificially-inflated face value , thus transferring the losses from the speculators to the taxpayers.

As the robot Bender from Futurama would say; "We're boned."