Economics 101: Obama earns some points

Posted on Friday 1 February 2008

Lots of folks were evidently keeping score during last night’s Democratic debate, with points awarded (or subtracted) for any number of categories: foreign policy, Iraq, health care, and immigration reform, for instance.

But there’s very little discussion about the single-most telling interchange for Polimom. It came near the beginning, with Hillary’s quick touch on the mortgage crisis. She said (my emphasis)

I want a moratorium on foreclosures for 90 days so we can try to work out keeping people in their homes instead of having them lose their homes, and I want to freeze interest rates for five years.

That’s a doozy of a soundbyte — and it’s incredibly irresponsible.

If you think there are problems in the mortgage and housing industries right now, you ain’t seen nuthin’ yet — because the effects of such a freeze such would be astoundingly destructive to the economy. Fortune recently summed it up most concisely:

Interest rates on new mortgages would skyrocket – perhaps past 8 percent, as the mutual funds, pension funds and other investors who typically provide capital to the mortgage market shift their money into other investments where the government isn’t impairing returns. With higher mortgage rates eroding buying power, the downward pressure on home prices would only increase. Lower home prices would lead to even more defaults, as more folks who’d lost the equity in their homes choose to walk away from their mortgages.

It’s not just that, either. Consider that there are many millions of people whose primary retirement vehicle is the equity in their homes. Suddenly their retirement funds are either inaccessible (because they can’t sell), or gone (if they can). Since this demographic group is Hillary Clinton’s primary support, this is doubly amazing.

And what about that traditional wealth building block of home-ownership? It’s value to the upward economic process hinges on equity.

It amazes me, frankly, that someone as smart as Hillary Clinton could be proposing something this irresponsible. Thus, Obama’s response last night was not just refreshing; it was illuminating:

I have not signed on to the notion of an interest rates freeze, and the reason is not because we need to protect the banks. The problem is, is that if we have such a freeze, mortgage interest rates will go up across the board and you will have a lot of people who are currently trying to get mortgages who will actually have more of a difficult time.

So, some of the people that we want to protect could end up being hurt by such a plan.

It’s bigger than that, but Obama’s on the right track… and his response was met with dead silence by the audience. Either they didn’t get it, or they didn’t care.

But if even an economics lightweight like Polimom can follow the destructive ripples in Hillary’s proposal, you can bet the fiscal conservatives will see them, and they’re going to (correctly) pin her to the wall on this.

Last night’s debate brought up any number of questions for me, and certainly there are areas where I have concerns. But in terms of understanding the ramifications of economic interventions, Obama gets one in the plus column right here.

Maybe two.

6 Comments for 'Economics 101: Obama earns some points'

  1.  
    February 1, 2008 | 11:56 am
     

    This is one area where Hillary is making me nuts. A blanket freeze is also dumb because there are plenty of people with ARMs who can pay them when they adjust. There is no reason to protect these folks from their own decisions.

  2.  
    belloscm
    February 1, 2008 | 2:36 pm
     

    A flat-out pander. This says a lot of things (none of them good) about a constituency that is willing to buy her brand of snake oil.

    The current benchmark for extreme economic recklessness is Smoot-Hawley. If given an opportunity, Hillary would retire this paradigm.

  3.  
    belloscm
    February 1, 2008 | 4:04 pm
     

    Polimom,

    Although Obama eventually arrives at the right answer “…if we have such a freeze, mortgage interest rates will go up across the board…” he gets there via a populist economic argument that ignores core fundamentals.

    If the credit providers (banks) don’t see their investments (credit) being both protected and provided with a reasonable ROI, they will not make credit available. They will place their cash in investments/instruments with lower risks and higher ROIs. Although he won’t admit it, I do hope that Obama does, in fact, know that we need to protect the banks. Otherwise, can you say “liquidity crisis?”

    Can’t let the folks know that those evil capitalists are both necessary and have rights, too.

  4.  
    February 1, 2008 | 4:54 pm
     

    I agree with your assessment of how he presented this, belloscm.

    While I’m inclined to ascribe a fair amount of bs (to both of them) due to the primary, but the lenders and the borrowers have a symbiotic relationship regardless of one’s starting point with the logic. He did, in fact, hit precisely on a very real outcome of what Hillary is proposing.

  5.  
    belloscm
    February 1, 2008 | 5:43 pm
     

    “…He did, in fact, hit precisely on a very real outcome of what Hillary is proposing.”

    Yes, he did. I only wish that he hadn’t passed on the opportunity to remain the audience of this fundamental, ” symbiotic relationship.”

    At the risk of going OT, he also had a chance to savage Hill over her Iraq “excuse.” That’s the real “fairy tale” in this campaign.

  6.  
    belloscm
    February 1, 2008 | 5:45 pm
     

    remind the audience, not remain the audience.

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