> So who gets support? People who are
> delinquent or in foreclosure? Why
> would anyone keep paying a mortgage
> then?
Because a reasonable plan, unlike the rough idea I suggest, would have to draw a sharp line somewhere. You'd have to meet certain criteria to receive relief. There's some experience in managing need-based government programs.
The principle is what matters to me. The idea of helping regular people deal with their problems and having the good effects of that trickle up, if at all, rather than the other way around.
Similar arguments have been used against any social program. It creates incentives for people to slack off. It's true, but the opponents of those programs exaggerate the defects of these programs to shut them down completely. So they oppose them as a matter of principle, not because of the defects, which can be minimized with some care in the design of the program and with some learning mechanism built into it.
It's obvious that a plan like that doesn't have currently the political support. I imagine that the reason why Doug is unpersuaded by the principle I try to lay out is that he sees no political force capable of implementing a plan like this. Neither do I. But that misses the point. The *principle* is defensible. We can make a sound political argument on the basis of fact and logic, and let the chips fall where they may. It's a way to agitate and make people question the premises of the approaches the powers use to deal with these crisis. We have to start somewhere.
> Besides, given delinquency rates for
> the whole, not just subprime,
> mortgage market, Julio's plan would
> cost about as much as the proposed
> one.
I don't think it would. If you help service the mortgages in the most extreme cases, the market will find a sort of balance. It would not be the bubble peak, but it would not be the debacle either. As I understand, Fannie and Freddie are already counted as under government control. They underwrite the bulk of the mortgages. If the direction of the market changes, delinquency rates will go down even among prime borrowers. And I don't buy the story that there's an overall excess supply of housing in the country. That may be true regionally, here and there, but even that I doubt.
Why? Because the demand for housing is constrained by the current distribution of income and wealth. And if you start using redistributive fiscal mechanisms to pump resources towards the poor, I'm sure it'll be revealed that in spite of the recent boom in construction, there's still a shortage of housing, because til now poor working people in the country are going to be able to afford housing. Housing demand is highly elastic to income, as it expands when the economy does well. It's also highly elastic to wealth, as it expands when rates fall. The CB says that less than 70% of all housing units are owner occupied, a number of them sharing 1, 2, or more apartments with renters. When you adjust for that, I estimate that about 50% of the people live in houses owned by their families and the rest are renters, disproportionately among them working poor families. Why? Because, considering the considerable tax incentives to owning homes, a plausible explanation why so many families are not owning is lack of means.
Owning your home in the U.S. means equity, wealth. That working people at the bottom start to accumulate a modicum of wealth, in the form of homes or whatever, gives them more leverage, economic (in and outside the workplace) and political, specially in a market stabilized by government intervention. At least a portion of the political pathologies of the working class in the U.S. comes from sheer economic fear. Technological dislocations, globalization, etc. It's all scary. Having some means to deal with economic uncertainty gives working people some assurance that, in principle, could tilt them in our direction. That's also why it's so important to get health care for working people, etc.
Jordan says that if taxpayers don't bail out the financial firms, credit will completely dry out. I doubt it if people at the bottom suddenly emerge with purchasing power. It's macro 101 how the spending multiplier is directly related to the marginal propensity to consume. Money given to people at the bottom is recycled and winds up unleashing more purchasing power throughout the economy than money handed to the top. And under the existing financial structures, the money will end up in the banking system.
Finally, if financial firms suffer a little for a while, what's too bad about that? As long as people at the bottom are taken care for.