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Commentary

How much rope to escape foreclosure?

Marketplace Staff Dec 19, 2007
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Commentary

How much rope to escape foreclosure?

Marketplace Staff Dec 19, 2007
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TEXT OF COMMENTARY

Scott Jagow: Treasury Secretary Henry Paulson is touring the country this week. He’s telling people about the White House plan to help homeowners facing foreclosure. Rates on certain loans would be frozen for five years, as you’ve probably heard. Commentator Robert Reich says the whole idea would leave too many people out in the cold.


Robert Reich: It’s an old saw that when people are drowning, Republicans throw them a rope so short it doesn’t reach them, while Democrats throw them a rope so long it can’t pull them out.

For homeowners in danger of drowning when their mortgages are reset at higher rates over the next two years, the Bush Administration’s response is the short rope: Freeze rates for people with good credit histories who are likely to be able to meet the payments at such fixed rates. Fine as far as it goes, but most of the nearly two million families in danger of losing their homes won’t qualify.

Now some Democrats, meanwhile, want to throw out too much rope. Take, for example, Hillary Clinton’s suggested temporary moratorium on foreclosures. That’s fine for homeowners at risk, but it would make banks more wary about offering mortgages to anyone, even families with good credit histories.

Either way, too little rope or too much will cause more people to lose their homes or not be able to buy one, further depressing home prices and adding to losses on mortgage-related securities. Which means a continuing credit crunch, and that dread combination of recession and inflation called “stagflation,” from which even the Fed can’t rescue us.

So how much rope is just right? A few days ago, Alan Greenspan suggested throwing it precisely to the people who are going down. Give direct aid to struggling homeowners analogous to money given disaster victims, so they can meet their payments. Better to bail out families who didn’t know the risks they were getting into than lenders who had every reason to know. And better to pay the costs now and get this behind us than suffer risks and uncertainties that slow the economy for years.

Greenspan should know, because he’s partly responsible for the mess. A few years ago, he made money so cheap lenders shoved it out the door to any borrower who wanted it. And then he forgot the Fed was supposed to oversee lenders to make sure they were acting responsibly. Maybe Greenspan’s new idea is his way of making amends.

Jagow: Robert Reich was Labor Secretary under President Clinton. His new book is called “Supercapitalism.”

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