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More Bailouts, Urge Left-Leaning Journalists

Left-leaning journalists are urging more mortgage bailouts to try to increase consumer spending, since they erroneously think that inadequate consumer spending is the principal cause of the current bad economy. This is a fallacy: As economist Mark Calabria has noted, consumer spending is currently high as a percentage of the economy compared to most periods in American history, and is low only compared to the unsustainably high levels reached during the housing bubble, when people borrowed rather than saved. It is corporate investment, not consumption, that is too low and needs to rise. Companies, and even Democratic businessmen, are afraid to invest and create new jobs now, because they fear costly, unpredictable new federal regulations and mandates from the Obama administration (such as the 2010 Dodd-Frank financial law, and the health care reform law, whose estimated cost just went up by another $50 billion annually and which will reduce the size of America's work force by hundreds of thousands of people). Apparently thinking that the government can create money out of thin air through mortgage bailouts, The New York Times's editorial board yesterday urged the Obama administration to pressure banks to cut the principal balances of people who imprudently borrowed too much money, even as it admits that such "principal reductions are seen as rewarding reckless borrowers," since doing so will "free up money for borrowers to use for paying down principal or consumer spending." But doing that doesn't create any new wealth, or free up new money, all it does is transfer money from savers to borrowers. Enriching borrowers at investors' expense results in investors feeling poorer and spending less money, reducing economic activity related to their purchases. The Times just ignores the fact that forcing banks to write off loans will harm bank shareholders, resulting in them spending less money. Thanks to my recent losses in the declining stock market, which will make it harder for me to ever retire, I have already reduced consumer spending, and to save money, I no longer eat out in restaurants. As Mark Calabria notes, bailing out borrowers at the expense of savers does nothing to expand the economy, and mortgage writedowns do not create wealth, but rather discourage its creation over the long run. (The Times notes that the Obama Administration is planning new "housing relief" -- presumably, mortgage bailouts at the expense of taxpayers and investors -- in the upcoming jobs plan that Obama has promised to issue in September. The administration's past jobs proposals, like the $800 billion stimulus package, have been deemed a failure by many economists like Harvard's Jeffrey Miron and Ohio State's Bill Dupor.) The Times's myopia is echoed by The Washington Post's liberal columnist E.J. Dionne, who argued yesterday for yet more federal intervention in the "mortgage mess" in hopes of somehow increasing consumer spending. The Obama administration is now working with state attorney generals to pressure banks to bail out even mortgage borrowers who don’t need help. Pension funds that millions of Americans rely on for their retirement will suffer, since those pension funds are major investors in the banks. So are Americans' shrinking 401(k) plans, which often are composed heavily of mutual funds that invest part of their money in banks (like Bank of America, whose stock value fell from $19 to less than $7 partly due to new laws backed by Obama like the Dodd-Frank Act). It's also mulling a risky mortgage modification scheme that would enrich even speculators and McMansion owners while "forcing investors to take it on the chin." In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way). Such attacks on property rights, and a constant wave of new regulations, create economic insecurity that wipes out jobs. The liberal-leaning Yale professor Stephen Carter recounts being told by a businessman that he would not hire more employees despite having a "successful business." Why not? "Because I don’t know how much it will cost,” the businessman explained. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?” As Carter notes, "He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost." As a Boston business owner, Terry Catchpole, noted in the August 20 New York Times, economic uncertainty due to the current administration has wiped out jobs at companies like his. As he noted, "Two years ago our executive communications company had 17 employees. Today it has seven. We very much would prefer to have employees. The primary reason we do not is that, like many small businesses, we are dependent on big businesses as customers. And the big businesses that we would ordinarily depend on to become clients are sitting on their cash, because they are deathly afraid of an Obama administration that has been hostile to business . . . They have no idea where the administration's next attack is coming from, and how much it is going to cost them to defend. So businesses do not spend money; they do not hire my company; and we cannot hire back those 10 good people we had to let go.” Democratic businessman Steve Wynn called the Obama administration "the greatest wet blanket to business and progress and job creation in my lifetime," saying that "the business community in this country is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs."