What I’ve noted more than anything else during the debate in the progressive community over the Emergency Economic Stabilization Act of 2008 is a startling lack of wide-lens analysis. Most of the discussion has been related to whether the bill is a giant looting of the treasury to benefit the GOP’s banker friends or a necessary measure to get credit flowing again. Other analyses have focused on mandates, adequacy of oversight, foreclosure protections, and the likelihood it will fulfill its ostensible purpose. But here is something to think about. What does it mean for our government to buy $700 billion of distressed mortgage-debt? How will the mere fact that the government owns that debt change the structure of the national debate and the interaction between the parties?
Set aside, for a moment, what we’ve become familiar with. You know all the dividing lines between and within the parties. You know what we’ve been fighting over ever since the Gingrich Revolution swept the Republicans into power. Forget it. The federal government is now an investor in your mortgage and the value of your home. If they don’t protect those things, you won’t be the only one that loses money and budgetary flexibility.
Now…think about this. If you are a budget hawk, your number one priority is going to be to preserve the value of the $700 billion of Big Shitpile that you’ve just purchased. As home values drop, foreclosures increase, and the government loses money. Budget hawks will want, first of all, to stop the bleeding. But they will quickly discover that no normal tinkering or small-ball can stop the downward spiral. Whether you are a Democrat or a Republican, you now own the problem. And you will drop a lot of the ideological rigidity that has defined your party for the last fourteen years (at least) to look for anything that might work.
This Economic Recovery Bill is a gamechanger. In my opinion, it’s kind of a backdoor infusion of socialism. Nothing in the bill directly stinks of socialism (except for some degree of equity warrants), but that won’t matter. When the government owns your mortgage debt they want to be paid. They don’t want foreclosures. For this reason, I don’t think there is any need to worry about a lack of mandate on Treasury to renegotiate loans. They will do it.
For the doubters, think about this. When your bank chops up your mortgage and sells it off, they have no incentive or capacity to waste man-hours renegotiating your mortgage. Even if Lehman Brothers owns a slice of your mortgage, they have no mechanism to renegotiate your mortgage terms. They don’t even know you. As long as the Shitpile remained locked up in frozen near-worthless assets, there was no way to tackle the foreclosure issue in an efficient and systemic way. We had to restore some level of one-on-one transactional reality between the borrower and the lender. The legislation that just passed is vague on how this is going to happen. But it has to happen, and the government is massively incentivized to make it happen.
This housing crisis, which is now a direct budgetary crisis for the federal government, is going to fundamentally re-order how conservatives and progressives think about government. There will be a new consensus, but that consensus will be shifted, by necessity and new incentives, far to the left. It isn’t the bill itself that is responsible, but the overall financial crisis. But even this fairly crappy Paulson-inspired bailout will eventually be seen as a fairly radical-leftist bill. And, that’s before Obama (hopefully) gets sworn in and changes the bankruptcy laws, etc.
