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Hypocrisy That's Hard to Bear

By Steven Pearlstein
Friday, March 28, 2008

Well, isn't this rich: Max Baucus of Montana and Chuck Grassley of Iowa, chairman and ranking member, respectively, of the Senate Finance Committee are suddenly in a lather that taxpayer funds might be implicated in the Federal Reserve's rescue of Bear Stearns.

Would that be the same Max Baucus and Chuck Grassley who have made careers out of protecting and enhancing the lavish system of import restrictions, price supports and other subsidies that have transformed American farming and ranching into a vast socialist enterprise? You betcha.

Whatever you want to say about the sharpies on Wall Street, they are pikers compared to Max's and Chuck's friends down on the farm when it comes to picking the pockets of taxpayers and consumers, or concocting a system in which the farmers get all the gains while the government assumes most of the risk.

In case you hadn't noticed, this last year has been a banner one for farmers, thanks to bountiful harvests and record commodity prices. The average farm household income in 2006 was $77,654, or about 17 percent higher than the average for nonfarm households. And next year, that's expected to rise to $90,000.

But for Max and Chuck, that's no reason to cut back on farm socialism. No siree. Farmers are expected to pull in $13 billion in federal subsidies this year. And there will be plenty more once Congress gets around to passing a new five-year farm bill later this spring.

In fact, the big concern out in farm country these days is that rapidly rising commodity prices are putting the financial squeeze on ethanol plants and grain elevators. It's probably only a matter of time before Max and Chuck weigh in with "emergency" legislation providing government loans to these cash-strapped operations, just like the Fed is doing with the investment banks. Only unlike the Bear Stearns shareholders, you can be sure that the farmers who own these businesses won't lose a dime.

Seriously, folks, this isn't the time for members of Congress to come sauntering back from another of their vacations and begin second-guessing the battlefield judgments of Fed and Treasury officials who have been working day and night to prevent a meltdown in global financial markets.

Despite the bleating from Capitol Hill, there really isn't much "taxpayer money" at risk in the Bear Stearns deal, in the way most of us understand that term. While the Fed is certainly a government entity, it has about $800 billion in assets on its balance sheet -- Treasury bonds and gold, mostly -- along with the power to print as many dollars as it needs or deems appropriate. Its recent interventions into the workings of financial markets have certainly been extraordinary, and carry serious, long-term consequences for inflation and moral hazard. But "cost to taxpayers" ought to be well down on anyone's list of worries.

If Max, Chuck and their buddies in Congress want to be helpful, they might better turn their attention to the housing crisis, which is real and immediate and has serious implications for the financial system and the economy.

Contrary to what you might be hearing, the goal here shouldn't be to prevent housing prices from falling. In fact, the aim ought to be to get them to fall as quickly as possible to a level consistent with the incomes of the people who live in them, or could potentially buy them. For it is only at that point that sellers, buyers and lenders will regain the confidence necessary to start selling, buying and lending again.

Nor should you worry much about those reports that, if home prices fall another 10 or 15 percent, there will be tens of millions of Americans with property worth less than the mortgages they are supposes to secure. Upside-down mortgages are only a problem if homeowners don't have the income to keep up with their payments, or are forced to sell their property. Once a normal market resumes, prices will rise even as outstanding balances will decline, and most of these situations will resolve themselves naturally.

But that still will leave millions of Americans who can't keep up with their payments or won't be able to when their variable mortgage rates reset. Some of these are speculators and fraudsters who deserve to lose their property, although this group is not as big as John McCain seems to think it is. The rest are just ordinary folks who didn't understand, or took on too much risk, and there are lots of good public policy reasons why the government should try to keep them in their homes.

This doesn't need to involve Hillary Clinton's across-the-board rate freezes and foreclosure moratoriums. Nor does it require the Federal Reserve to step in and purchase billions of dollars in mortgages and mortgage-backed securities.

At the same time, it probably isn't going to happen just by relying on the voluntary program worked out between the Bush administration and the mortgage finance industry.

The best proposal on the table is the one offered by Barney Frank, chairman of the House Financial Services Committee and far and away Congress's best bipartisan dealmaker. Frank's proposal has a combination of carrots and sticks designed to get lenders to take their losses by writing down loans to a level that reflects the current value of the home and the income of the homeowner.

The stick includes the threat of a forced workout through the bankruptcy process, which under current law excludes home mortgages.

And the carrots include a new program run by the Federal Housing Administration that would refinance these troubled loans with fixed-rate mortgages at 85 percent of the current value of the property. The FHA, in turn, would be authorized to package and auction off these new government-guaranteed mortgages to private investors.

There are lots of interesting variations on this basic proposal floating around: limitations on the bankruptcy option to prevent abuse and dampen its impact on mortgage rates; secondary liens that would give the government, or the old lender, a share in any capital gains on the house when it sold; tax incentives to encourage lenders to take the write-downs. A federal backstop the mortgage auctions in case private investors decline to participate.

Normally it would take Congress years to process a proposal that raises so many ideological issues and touches on so many well-financed special interests determined to wage a fight to the death over every little detail.

But these are not normal times. They are desperate times that require decisive action and creative leadership of the sort already demonstrated by the Fed, the Treasury and Frank. But most of all they require Max, Chuck and other members of Congress to put aside their grandstanding, their petty prerogatives and their partisan bickering and demonstrate a quality that's been sorely lacking in Washington in recent years -- a capacity for enlightened and constructive followship.

Steven Pearlstein can be reached atpearlsteins@washpost.com.

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