Speaking of moral hazard

This really is a kick in the gut to struggling homeowners. To turn this into a straight transaction analysis when underwater mortgages are such a huge drag on the economy is just plain crazy:

The federal regulator for government-backed mortgage giants Fannie Mae and Freddie Mac said Tuesday that he would not allow the firms to reduce loan balances of troubled borrowers, saying there would be no clear-cut financial benefit and that such a move could cause some homeowners to intentionally default in hopes of getting taxpayer aid.

“We concluded that the potential benefit was too small and uncertain, relative to the known and unknown costs and risks,” said Edward J. DeMarco, acting director of the Federal Housing Finance Agency.

The decision came after months of internal analysis at FHFA and sustained pressure from the Obama administration, Democratic lawmakers on Capitol Hill and housing advocates, who argued that so-called “principal reduction” was an essential tool needed in helping to soften the fallout of the housing crisis.

Reaction to DeMarco’s decision came swiftly Tuesday afternoon.

Treasury Secretary Timothy F. Geithner struck an unusually personal tone in chastising DeMarco for his decision, even while acknowledging DeMarco’s role as an independent regulator of Fannie and Freddie.

“Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes and the legacy of the crisis continues to weigh on the market,” Geithner wrote in a letter to DeMarco on Tuesday. “You have the power to help more struggling homeowners and help heal the remaining damage from the housing crisis.”

Paul Krugman responded by calling for DeMarco to be fired:

DeMarco’s basis for the rejection was that this forgiveness would represent a net loss to taxpayers, even if his agency came out ahead.

That’s a very arguable point even on its own terms, because the paper he cited (pdf) in support of his stance took no account of the positive effects on the economy of debt relief — even though those effects are the main reason for offering such relief. Since a reduction in debt burdens would strengthen the economy, this would mean greater revenue — and this might well offset any losses from the debt forgiveness itself.

Furthermore, even if there’s a small net cost to taxpayers, debt relief is still worth doing if it yields large economic benefits.

In any case, however, deciding whether debt relief is a good policy for the nation as a whole is not DeMarco’s job. His job — as long as he keeps it, which I hope is a very short period of time — is to run his agency. If the Secretary of the Treasury, acting on behalf of the president, believes that it is in the national interest to spend some taxpayer funds on debt relief, in a way that actually improves the FHFA’s budget position, the agency’s director has no business deciding on his own that he prefers not to act.

I don’t know what DeMarco’s specific legal mandate is. But there is simply no way that it makes sense for an agency director to use his position to block implementation of the president’s economic policy, not because it would hurt his agency’s operations, but simply because he disagrees with that policy.

This guy needs to go.

Krugman’s right. It’s not DeMarco’s job to impose his philosophical orientation on his agency.

Hat tip to V.E. Hicks, attorney!

Let’s make a deal

I can’t say I have a good feeling about this. Why are they cooperating on this?

WASHINGTON — The top Republican and Democrat on Capitol Hill have announced an agreement to keep the government running on autopilot for six months when the current budget year ends on Sept. 30.

The announcements by Democratic Senate Majority Leader Harry Reid and GOP House Speaker John Boehner are aimed at averting any chance of a government shutdown this fall. The legislation will pass in September.

The deal would also lighten the crush of business in a post-election congressional session agenda that’s already overloaded.

“The speaker and I and the president have agreed that we’re going to fund the government for the next six months,” Reid said. “It’ll provide stability for the coming months.”

The agreement would fund the government at levels called for by last summer’s budget and debt pact between Boehner and President Barack Obama.

While precise details will be ironed out over the August congressional recess, the deal embraces spending at a total annualized rate of $1.047 trillion for the day-to-day operations of Cabinet departments like the Pentagon and other federal agencies.

“We are encouraged that both sides have agreed to resolve this issue without delay,” White House Press Secretary Jay Carney said in a statement. “The President has made clear that it is essential that the legislation to fund the government adheres to the funding levels agreed to by both parties last year.”

That’s a retreat for Republicans, who had sought to cut $19 billion below the budget agreement reached last summer with President Barack Obama and shift $8 billion more from domestic agencies to the Pentagon. The alternative of risking a government shutdown just weeks before Election Day was an unacceptable alternative to GOP leaders who want to keep the spotlight off of Congress and on the presidential race in the weeks running up to Nov. 6.

Via Roll Call, Debbie Stabenow says other measures could be attached to the continuing resolution:

One possibility, she said, was to add disaster assistance for farmers to deal with the drought in the Midwest. “It could be, if people agreed to it. A lot of things are expiring Sept. 30,” Stabenow said. She said the CR was unlikely to be completed until September.

However, sources today said House GOP leaders were thinking of moving a separate disaster aid measure this week, before adjourning for the August recess.

There’s been a growing consensus among lawmakers across the political spectrum that it would be best to delay the wrap-up of fiscal 2013 appropriations into the next session of Congress. Fiscal 2013 begins Oct. 1, making it critical that Congress clear a continuing resolution before Members of the House and about a third of the Senate head home to campaign in October.

Many members of the conservative House Republican Study Committee have said they would grudgingly support a CR set at the fiscal 2013 level agreed to in last year’s debt limit deal and also accept interim funding for implementing the 2010 health overhaul in exchange for delaying fiscal 2013 appropriations. Republicans are betting on gains in November that could enable them to push for deep spending cuts next year.

This also clears the deck for a Grand Bargain in the lame duck session. Stay tuned.

Fire and rain

There I was, sitting on the stage of the old Electric Factory while James Taylor performed for me and my friend. Sigh…

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