Wednesday, August 22, 2012

Remember the name Edward J. DeMarco and curse it


People talk about fixing our economic problem by regulating or deregulating or inflating or deflating or by... well, the list goes on and on. But, what *IS* the problem?

Debt.

And how do we know this?

Because the economy tanked all of a sudden when deleveraging became all the rage.

So what must the solution be?

The solution can only be to help with deleverage: to help reduce private debt as soon and as fast as possible. To get us to the point where we don't have to reduce debt.

Joseph E. Stiglitz and Mark Zandi write:

Late last month, the top regulator overseeing Fannie Mae and Freddie Mac blocked a plan backed by the Obama administration to let the companies forgive some of the mortgage debt owed by stressed homeowners. While half a million homeowners could be helped with a principal writedown, the regulator, Edward J. DeMarco, argued (we believe incorrectly) that helping some homeowners might cause others who are paying on their loans to stop so that they also could get their mortgages reduced.

First of all, so what if others also want their mortgages reduced? That is exactly the thing that must be done. We should prevent this thing that needs to be done, because it is something people want?

That probably gets us into the arena of "moral hazard". That's fine. Let's look at the problem again.

The problem is debt. Excessive private sector debt.

The solution must be to reduce private sector debt.

If you have some excuse for not allowing the reduction of private sector debt, then you are delaying or preventing economic recovery.

Edward J. DeMarco, you are delaying and preventing economic recovery. Get off your damned high horse, Edward, you holier-than-thou son of a bitch.

And for the record, the right time to be a moralistic prick would have been the 1990s, when you were instead encouraging the excessive use of credit and the excessive accumulation of debt. Or the 1980s, when you were encouraging the excessive use of credit and the excessive accumulation of debt. Or the 1970s, when you were encouraging the excessive use of credit and the excessive accumulation of debt. Or even in the 1960s.

Then, it would have been a heroic stance to take. Now, it is a horrific stance.

2 comments:

Joshua Wojnilower said...

I very much agree with the notion of principal reduction and, in fact, would like to see the plan extended well beyond those "stressed homeowners."

Two things I thought I should point out though...
1) There is a sizable number of homeowners currently living in houses without paying their mortgage while foreclosure procedures can take over a year. Reducing the principal in these select cases may (oddly enough) hinder short-run demand if those homeowners are forced to start paying the mortgage and interest.
2) To my knowledge, DeMarco's mandate is to protect taxpayers from accepting the burden of bad loans. One can certainly make the case that in the long-run taxpayers will be better off taking the short-term hit, but that's not as clear. (Under a modern money regime I'm actually not sure what protecting taxpayers should mean).

I clearly don't agree with DeMarco's decision from a macroeconomic standpoint, but I'm not sure his hands aren't a bit tied by a stupid mandate.

Jazzbumpa said...

You're beautiful when you're angry.

I know nothing about DeMarco, but will take a wild ass guess that he has no more concern for the taxpayer than he does for those with sub-aqueous mortgages; but that he does care very much about bankers.

Just a wild ass guess.

JzB