The People Versus the Politicians

02/23/2009 11:10 am EST


Terry Savage

Author, The Savage Truth on Money

President Obama’s new plan to prevent foreclosures has many of the same drawbacks as the stimulus bill, which he signed last week. Both are full of good intentions and comforting provisions for those who find themselves in financial trouble. Both pay lip service to words like “stimulus” and “incentives.”

But both are Big Government programs that may do more harm than good in their efforts to “fix” problems.

The foreclosure plan doesn’t require much action by Congress. A directive would allow Fannie Mae and Freddie Mac to refinance loans up to $729,000—without requiring that the loan be for no more than 80% of the home’s value. Thus, those who are “under water”—with less equity than the home’s current appraised value—would get access to low-rate government-guaranteed mortgages.

Another part of the proposal requires that participating lenders cut interest rate to limit mortgage payments to 38% of gross income. The government would then subsidize the mortgages, cutting payments to no more than 31% of income, at a cost of $75 billion. 

Just who would be eligible for these subsidies is not clear. There’s bound to be a lot of demand for these sweet deals, that’s for sure. Who will decide who’s deserving?

Although this program may give relief to some homeowners, in the end, both it and the stimulus plan rely on government to make the decisions, to pick winners and losers, and to subsidize those solutions with money taken from people who aren’t in financial trouble—yet!

It’s easy to blame the markets and the overwhelming greed of those who profited at others’ expense. There is simply no way to defend that kind of behavior. It is an example of human nature at its very worst!

An equally dangerous mistake, though, is to decide that the answers lie with government planning, bank nationalization, Congressional control over asset allocation, and government subsidies to failing industries. 

You don’t need a long memory to see how that kind of “planned” economy leads to shortages, stagnation, and black markets. Central planning was tested to death in the old Soviet Union.

Certainly, there must be a middle ground. Somewhere between the ravages of greed and the monstrosity of government control, we must find the path to get the economy growing again.  

But it won’t happen by pitting Americans who saved and paid off their mortgages—or are still paying—against those who were either greedy or unfortunate enough to be caught in this recession. We can’t draw a line and say that on one side are “good” Americans and that those on the other side are “bad.” And we can’t allow government to determine which is which.

Yet the foreclosure plan (or housing bailout) relies on precisely that kind of approach, throwing billions of taxpayer dollars at the issue while encouraging government agencies to subsidize less rigorous lending (which got us into this mess). 

We’re assured that “greedy speculators” won’t profit from this program.  What’s truly assured is that those who played the game by the rules will subsidize the uncertain outcome of this latest government meddling.

America is walking a fine line these days. We are a generous and optimistic people. But our history shows that Americans can only be pushed so far when it comes to taxing their efforts.

Politicians are trying to make it look as if it’s Democrats vs. Republicans when it comes to debating our economic future. But more and more, it’s looking like Americans vs. all the politicians of both parties who have been digging into the pockets of Americans under the guise of “helping.”

When it comes to that confrontation, my bet is on the American people. What’s your view? Please have your say and join the conversation.

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