What I think I know about the mortgage mess

Actually, everything I think I know about the mortgage mess may turn out to be wrong. But here, for the record, is my take on the alleged crisis and its political impact.

First, there seems to be something approaching consensus-level agreement as to what went wrong. After the tech bubble exploded, the housing market was, by far, the best thing going in the economy. Washington policymakers decided to ride the housing boom as far as it would take them. The Fed encouraged massive mortgage lending by making money so cheap. The Democrats pursued policies that would enable people (minorities in particular) to qualify for mortgages they couldn't really afford, even as Republicans in Congress sought to rein in such dangerous practices. The Bush Administration failed to take aggressive action to stop the mortgage madness, while continuing to claim success for uninterrupted economic growth and increases in the percentage of the population that owned their own homes. Meanwhile, as Wall Street's portfolio of risky loans became ever more bloated, a bursting of the housing bubble threatened to bring down the entire credit industry.

While even this simplified version of events is probably beyond the ken of the average voter, at least there does not appear to be in currency a competing explanation for the current crisis. The average voter, I believe, will appreciate that the root cause of the crisis was too many bad loans.

The average voter will also perceive (correctly) that there is plenty of blame to go around. This was a problem of "greed" on the part of lenders, stupidity on the part of borrowers, and incredible shortsightedness on the part of the government. The Bush Administration will naturally take the lion's share of the blame for the government's role, but voters won't let Congressional Democrats off the hook and won't necessarily tag John McCain for the administration's failures.

As for the proposed solution -- using $700+ billion in taxpayer dollars to take the bad loans off the hands of the banks that now own them -- I don't think voters are going to feel confident one way or the other as to whether this is the right thing to do. On the one hand, the guys at the top (Bernanke and Paulson) seem genuinely convinced that this is the only way to head off a full-scale economic disaster. One the other hand, voters can't help but be skeptical of the forecasting skills of these men, who arguably should have seen this day coming a long time ago. Meanwhile, since the proposed bailout doesn't have any obvious partisan dimension, most members of Congress are at a complete loss in trying to figure out what to do. The best voters can do is pray that Washington guesses right on the bailout.

Although it will take a long time for the dust to settle, I do think Barack Obama has already made a big mistake in all of this. While he essentially supports the massive bailout, he is at the same time insisting that it be expanded in some way to give relief to homeowners facing foreclosure. I think he is badly misreading public sentiment. The vast majority of voters aren't facing foreclosure, and the reservoir of sympathy for those who are is running low. People who got in over their heads are perceived to share a great deal of the blame for this crisis. The average citizen is worried about how much this bailout will cost and whether it will even work to head off a major recession. The last thing they want to hear is how they now need to bail out low- or middle-income borrowers who had no business buying half-million-dollar homes.

The public reluctantly supports the bailout plan because it may be the only hope of saving the economy. There is no comparable necessity for bailing out individual homeowners having trouble paying their mortgages. Voters who understand this will not appreciate Obama's attempt to condition a bailout of Wall Street on a bailout of Main Street. For those doing the bailing, one bailout is quite enough, thank you.

I think Obama's position also undercuts his credibility with voters in at least a couple of ways. First, the average American understands that the people who are at risk of foreclosure are disproportionately black or Hispanic. According to recent polling, Obama needs to connect better with working class whites, some of whom evidently fear that a black president would be biased in favor of policies that favor minorities. Even ignoring Obama's own race, the fact that he built his career as an advocate for low-income blacks lends support for the view that he would favor minority-friendly policies as president. Obama's desire to include a bailout of borrowers now facing foreclosure only reinforces such concerns.

Obama's position also subtly undermines his image as a different kind of politician from the hacks that ordinarily run Washington. In trying to include "Main Street" in the massive bailout, he is implicitly treating the plan as a pork bill rather than the desperate rescue operation its advocates are claiming. Perhaps the plan is just another D.C. boondoggle. But in that case, Obama should oppose it, not simply try to get his own hand in the cookie jar.

Obama was correct, I think, to tie his support of the measure to restrictions on executive compensation. Although Congress needs to figure out a way to deal with that issue more comprehensively, I see no reason not to start to reform the system right now, when taxpayer's dollars are hanging in the balance. The idea that CEOs are being paid market value for their services sounds good, but assumes that executive compensation is really driven by competitive market forces. I think excessive executive compensation is the result of tacit price-fixing in the executive suite. After all, it's the guys in the boardrooms who are actually doling out the money, and they're doling it out to other corporate bigwigs. They all expect to cash in, and so they all have an incentive to keep executive compensation at absurdly high levels, without any real regard for the economic contributions of the people making the dough. It's the classic case of the wolves guarding the sheep, and conservatives would do well to recognize it rather than assume this is just the "invisible hand" at work.