By Edmund L. Andrews
Published: 04-02-08
WASHINGTON — When an election campaign coincides with both a crisis on Wall Street and soaring home foreclosures across the country the traditional ideological battles over “more government” or “less government” become blurred.
Senator Barack Obama and Senator Hillary Rodham Clinton the Democratic candidates for president claim to have proposed a more activist role for government than either President Bush or the likely Republican presidential nominee Senator John McCain and the Democratic rhetoric makes the contrast appear even sharper.
But while their philosophies might seem starkly different in reality both parties have come to the conclusion that major government involvement is needed to rescue the financial and housing markets.
The ideological clashes are less about whether the government should intervene in the economy and more about whom it should try to rescue.
“Democrats are more likely to propose protecting individuals and Republicans are more likely to propose protecting markets” said William A. Niskanen chairman of the Cato Institute a libertarian research group in Washington that champions smaller government.
Despite differing approaches Democrats and Republicans may end up in a similar place because it will be difficult to protect individuals without protecting the markets and the markets will remain fragile if individuals suffer huge declines in their personal wealth.
For now the parties seem to be worlds apart. This week the two Democratic presidential contenders seized on the deepening economic crisis and proposed broad government rescue plans for homeowners that would each cost about $30 billion.
The Bush administration dismissed such ideas as bailouts and vowed to veto even modest Democratic bills to help homeowners. Mr. McCain asserted this week that “it is not the duty of government to bail out and reward those who act irresponsibly.”
In practice the Democrats have not really had to confront the full fury and magnitude of the crisis. Measured in dollars their biggest proposals are small compared with the hundreds of billions of dollars that the Federal Reserve has decided to lend to struggling institutions and compared with the magnitude of losses in home values and defaulted mortgages.
Mr. McCain and the Bush administration meanwhile have staunchly supported one of the biggest government interventions in the last century: the Federal Reserve’s decision to lend as much as $400 billion at rock-bottom rates to banks and Wall Street firms.
The Fed’s rescue operation involves a sum many times more than Democrats proposed spending on homeowners and it comes on top of a host of other injections of government money into the economy. First came the bipartisan economic stimulus package which this year alone will provide about $152 billion in tax rebates and temporary tax cuts to help spur consumption.
Then came a series of moves to greatly expand the roles of Fannie Mae and Freddie Mac the giant government-sponsored mortgage finance companies.
And this week the Federal Home Loan Bank Board decided to lend an extra $100 billion to member banks for mortgage financing.
In a speech this week Mrs. Clinton compared Mr. McCain’s approach to that of Herbert Hoover and said “I don’t think we can afford four more years of that kind of inaction.” Mr. Obama laying down his own marker on Thursday declared that “the free market was never meant to be a free license to take whatever you can get.”
But the two Democrats have also proposed a number of changes — such as the expanded role for Fannie and Freddie — that President Bush has recently adopted as well.
An area where the parties do seem to have sharp disagreements is regulation particularly of investment banks.
Democrats in Congress and on the campaign trail are pushing for tougher restrictions on deceptive or risky mortgage lending stricter rules for credit-card issuers and new rules that would allow bankruptcy judges to reduce the size of mortgages. Democrats have also called for tighter supervision of Wall Street firms.
Republicans have resisted a swing back toward greater regulation. Though the Bush administration is expected to unveil next week a sweeping blueprint for overhauling the financial regulation administration officials have made it clear their main goal is to streamline regulatory agencies.
The most radical idea that Mr. Obama and Mrs. Clinton have endorsed is for the government to step in and refinance mortgages for as many as two million homeowners who are at risk of defaulting.
The idea is based on bills being drafted by Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut both Democrats. The legislation would let the Federal Housing Administration guarantee as much as $300 billion in mortgages if the existing mortgage lenders agreed to reduce the loan amounts to levels that the borrowers could realistically afford.
In effect the government would be taking over mortgages heading toward foreclosure. The mortgage lenders would have to swallow a significant loss but the government would offer them a chance to recoup some of their losses if the houses were eventually resold at a higher price.
The measures would provide about $10 billion to underwrite about $300 billion worth of federal loan guarantees and another $10 billion for states and localities to help finance affordable housing programs.
President Bush and his top advisers oppose the idea arguing that it would be a bailout for both irresponsible lenders and irresponsible borrowers. Henry M. Paulson Jr. the secretary of the Treasury ridiculed the proposals as “not yet ready for the starting gate.”
But Republicans are still looking for new ways for the government to soften the crisis.
The Bush administration began a new program called F.H.A. Secure last summer which is intended to help people refinance high-cost subprime mortgages. Industry executives and consumer groups say the eligibility rules are far too narrow to make a dent in foreclosures and administration officials are looking at ways to expand the program.
The administration’s other big effort has been a voluntary program called Hope Now under which mortgage lenders agree to freeze a borrower’s interest rate at its low introductory level. But industry analysts estimate that only about 3 percent of subprime borrowers are likely to benefit from that program. More than 20 percent of subprime mortgages are already delinquent.
Mr. McCain and other Republicans have argued that homeowners and lenders alike need to endure a correction from the wild run-up in housing prices in recent years as well as from unwise and often fraudulent mortgages.
“Some Americans bought homes they couldn’t afford betting that rising prices would make it easier to refinance later” Mr. McCain said this week. “Our system of market checks and balances did not correct until the bubble burst.”
Republican lawmakers and President Bush have been busy on other fronts. For years they had sought to shrink the role of Fannie Mae and Freddie Mac which raise money at lower rates than private banks because they have an implied guarantee of government help if they get into trouble.
In the last several weeks Congress and the administration have loosened a number of restrictions on both companies which analysts estimate will allow them to finance an additional $200 billion in mortgages this year.
But there are risks to taxpayers. Some analysts predict that both companies will face as much as $12 billion in losses this year largely because falling home prices are expected to lead to a surge in defaults that will infect even the conservative mortgages guaranteed by Fannie and Freddie.
The government is not technically obligated to bail them out but if the companies veered toward insolvency political leaders would be under intense pressure to do so.
