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Jim Scott
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Puritanism, Politics and Foreclosures

    There is a question that has yet to be fully addressed by our betters. In this election season office holders and their challengers have found it poor politics to get too specific with this problem. And that is how to do deal with the growing problems of lender assets and their botched foreclosures. The issue gets difficult because of the intersection of morality, economics and politics. In this age of single issue politics and rampant polarization, gaining a consensus for a solution could prove impossible. The current policy of benign neglect, while successful in the short run, will eventually forestall any real recovery in the economy.

    Markets abhor uncertainty and until their is a clear road map for the endgame of the housing collapse, there will be no meaningful recovery in jobs and economic growth. Granted the problem is complex and globalized. Further, financial and political leaders now in place have no experience with a problem of this order. Still it is encumbent upon them to craft a plan that at the least begins an orderly process of final resolution. The nation has gotten the most out of the current policy of forestalling the days of some economic reckoning but now that policy is past the point of diminishing returns. Much to my chagrin, I find my position has gravitated towards the world of Charles Dickens.

    The Administration and Federal Reserve Board have made a gallant effort over the past two years to try to manage an orderly retreat from the height of the housing cycle. This writer placed great stock in the Administration’s many plans to assist troubled homeowners. Banks, for example, were encouraged and required to work with borrowers to modify existing mortgage payments so that most foreclosures could be avoided. The Fed drove down the lender’s price of money to near zero so that variable loans would become cheaper on their own. Through the policy of quantitative easing, the Fed purchased long term treasuries with the goal of lowering fixed rate mortgages.

    There is no question these policies helped some troubled homeowners. The problem is that the major beneficiary of these policies has not been those in need. There is new truth in the old saw that bankers are perfectly willing to loan you an umbrella only if it is not raining. Those with the most need simply did not qualify for help. Keep the life vests for those in the boat. To be fair there are other villans in this piece. Lenders, even if willing to help out, were hamstrung by their own policies, which were largely driven by Federal banking rules. And there is where conflicting moral, political and economic values collide.

    The roadblock is this: banks must be, in the eyes of their minders, solvent. The benchmarks that determine solven


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