http://www.nybooks.com/articles/21491
Volume 55, Number 10 · June 12, 2008
Economics: Which Way for Obama?
By John Cassidy
Nudge: Improving Decisions About Health, Wealth, and Happiness
by Richard H. Thaler and Cass R. Sunstein
Yale University Press, 293 pp., $26.00
The bursting of the housing bubble and the associated credit crunch has
so far wiped out about $3 trillion of wealth—nobody knows the exact
amount—caused havoc in the financial markets, and prompted hundreds of
thousands of homeowners to default on their monthly mortgage payments.
Some experts predict that by the end of 2009, the number of homes
entering foreclosure could reach two million. Not surprisingly, the
question of what to do about the housing crisis has emerged as a
divisive policy issue in the 2008 presidential election, with each of
the three leading candidates representing a distinct economic ideology.
John McCain, for all his protestations that economics is not his strong
point, has put forward a coherent, if somewhat heartless, case for doing
nothing, or very little, anyway. Echoing the arguments that Andrew
Mellon, Friedrich Hayek, and other enthusiasts of the free market
espoused in the early years of the Great Depression, McCain has said it
is no business of the government to bail out people who took out loans
they couldn't afford. Evidently such socialistic interventions would
only reward reckless behavior, and, in any case, they wouldn't work. The
laissez-faire argument says it is better to let the market
"correct"—i.e., let the foreclosures mount up—until people learn to live
within their means and prices become more affordable, at which point
sustainable economic growth will resume.
Hillary Clinton, after initially equivocating, has emerged as the
would-be heir to FDR and John Maynard Keynes. In addition to imposing a
ninety-day moratorium on foreclosures and a five-year freeze on certain
adjustable mortgage rates, she would have the federal government buy up
an undetermined number of troubled home loans, enabling lenders to
convert them to more affordable deals and putting a floor under the
housing market.
Clinton would also allow bankruptcy judges to reduce the value of
mortgages, a proposal the banking industry vigorously opposes, and she
has criticized McCain as the reincarnation of Herbert Hoover—a
comparison that is a bit unfair to the thirty-first president, whose
intellectual commitment to voluntarism didn't prevent him from expanding
public works programs, raising taxes on the wealthy, and creating two
institutions that funneled federal money into the housing market: the
Federal Home Loan Bank and the Reconstruction Finance Corporation.
Barack Obama has also criticized McCain for sitting back and watching
while so many American families face eviction. Yet his own proposals are
more nuanced than Hillary's. They include setting up a $10 billion fund
to help prevent foreclosures, cracking down on mortgage fraud, providing
tax credits to low- and middle-income homeowners who don't currently
itemize their interest payments, and standardizing the terms of
mortgages so that potential borrowers can more easily figure out when
they are being hoodwinked. Obama has also expressed support for
Democratic Senator Chris Dodd's plan to expand the Federal Housing
Administration's ability to refinance troubled loans. So far, though, he
has been noticeably less enthusiastic than Clinton about a large-scale
injection of public funds into the market for mortgages and mortgage
securities.
Should Obama win the nomination, political considerations may well force
upon him a more interventionist position, but his first inclination is
to seek a path between big government and laissez-faire, a trait that
reflects his age—he was born in 1961—and the intellectual milieu he
emerged from. Before entering the Illinois state Senate, he spent ten
years teaching constitutional law at the University of Chicago, where
respect for the free market is a cherished tradition. His senior
economic adviser, Austan Goolsbee, is a former colleague of his at
Chicago and an expert on the economics of high-tech industries. Goolsbee
is not a member of the "Chicago School" of Milton Friedman and Gary
Becker, but he is not well known as a critic of American capitalism
either. As recently as March 2007, he published an article in The New
York Times pointing out the virtues of subprime mortgages. "The three
decades from 1970 to 2000 witnessed an incredible flowering of new types
of home loans," Goolsbee wrote. "These innovations mainly served to give
people power to make their own decisions about housing, and they ended
up being quite sensible with their newfound access to capital."
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