Own-to-Rent on the Marketplace Morning Report

Economics correspondent Chris Farrell got the main points of the Own-to-Rent proposal across yesterday on Marketplace Morning Repot and added a bit of his own spice. From the transcript:

You know, the idea is out there. See there's a real problem with bailouts and let's just use the word bailout loosely all right? You don't want to reward speculators and you don't want to reward lenders. You really want them to suffer, you want that pain. They deserve to go to the seventh circle of hell anyway right? Now, but you do want to protect the homeowner that was misled. The benefit of this idea is that it's the most targeted idea I've seen that helps out that person, doesn't throw them out on the street, doesn't force them to go through foreclosure, and at the same time forces the lenders and the speculators to take a financial hit.

And I would add--the proposal does not force the taxpayer, whether directly through a government bailout or indirectly through greater involvement of Fannie Mae or Freddie Mac, to take a financial hit. This is what most makes it appealing to me, of all the different proposed interventions I have seen.

More on Own to Rent

Jim Pethokoukis picks up on Dean Baker's proposal in the current U.S. News & World Report. He quotes a phone conversation we had as follows:

Andrew Samwick, former chief economist for Bush's Council of Economic Advisers, admits his first instinct is that the government should do nothing. Yet he admits feeling more than a "pang of sympathy" for people who were misled when taking out subprime mortgages. So if the government does take action, he would prefer a plan like Baker's that "leaves as small a footprint as possible" over one that creates billion-dollar bailout funds or sweeping changes to Fannie Mae and Freddie Mac. Even Andrew Mellon might have approved.

This answers some of the thoughtful comments on the last post. In particular, if the government is going to intervene in some way, I want it done in such as way that it assists borrowers, not lenders. Baker's proposal in fact helps borrowers at the expense of lenders and does not create or expand the government (or government-sponsored) bureaucracy by much. My views of what happened in the floating rate mortgage market are very much influenced by advertising come-ons like this one that I blogged about last year. So I was persuaded fairly easily that some government-mediated remedy might be appropriate.

In the comments on the last post, ed asks a very good question:

Why should we give advantages to foolish buyers not enjoyed by prudent renters?

... or prudent buyers who locked in a higher (but still low) fixed-rate mortgages, ... or prudent buyers who chose a home that they would be able to afford when the ARM reset? These questions will arise any time that the government intervenes on distributional grounds. If these are your concerns, then you will join me in looking for the government intervention on the smallest possible footprint. This is not a policy that I think of as permanent, and it is certainly one that should only be invoked when there is evidence of systemic fraud or abuse.

The comments also point out that the problems of implementation and equity with Baker's proposal rise with the length of the guaranteed tenancy. That's a key parameter to be decided through the public policy process if the proposal moves forward.

Own to Rent

Here are some more details from Dean Baker on how his proposal to ease the burden on subprime borrowers would work.

If the government is going to intervene in the aftermath of this meltdown, I haven't seen a better proposal than this one.

Monopoly and Hypocrisy

After reading this list of charges against Brian McLaughlin, a Queens assemblyman and president of the New York City Central Labor Council, I'm sure many people will be calling for his head (myself included). McLaughlin is accused of:

• stealing $95,000 from Little League baseball teams to pay his rent.
• creating two no-show jobs on his legislative payroll and keeping part of one salary.
• using his subordinates as “personal servants,” to take his dog to the veterinarian, hang Christmas lights, trap rodents in his basement and clean out his barn.
• making an aide use his E-ZPass at tollbooths to make it appear that he had returned home from Albany later than he really had, allowing him to bill for daily allowances given to legislators.
• using more than $330,000 from his re-election campaign funds to pay for personal expenses like a rehearsal dinner for his son’s wedding, renovation of his $760,000 house in Suffolk County near Long Island Sound, payment of his country club membership fees and the purchase and installation of a plasma television for a female friend.
• using stolen money for an $80,000 Mercedes-Benz for his wife, marina fees, school tuition for one of his children, rent payments on his Albany residence and rent payments on his Queens residence.

If true, the only mysteries are how human DNA can be so configured to permit this stupidity and why it took so long to indict him.

Doing the math, the article reports that the total theft is $2.2 million over ten years in a union comprised of a million members. So that works out to 22 cents per member per year. Checking my own response to this, I got way more angry over it than I typically do to other economic crimes, like reports of CEO malfeasance, which often have much bigger financial impacts. So why am I so angry?

The union movement is predicated on protecting the rights of the downtrodden working class. It lobbies for special concessions from the rest of society--that we confer and protect the union's monopoly rents--on behalf a select group of people. And reports of corruption like this undermine that case, as McLaughlin would tell us that they are poor enough to need special protections from the rest of us but act in such a way that he believes they are not so poor that he cannot rip them off for his own financial gain.

The combination of state-sanctioned monopoly and hypocrisy is what set me off, well beyond the size of the actual crime.