I think your idea has merit. Can anyone doubt, at this point, that there's an inadequately understood and under-regulated connection between real estate and financial markets, eg? (BTW, the Fed does have some degree of a mandate to oversee lending practices in mortgage markets, but the were asleep at the switch.)

There may well be some of this sort consolidation coming down the pike, though don't look for everything under one roof. That may be over-consolidating. EG, the Fed should oversee the banking system, which now has to include the non-bank lenders. But I don't see them regulating commodity markets.

There's no dividing line because people like Krugman lined up in the post Reagan era behind laissez faire ideologues and enabled the sabotage of regulatory safeguard designed to prevent another Great Drpression.

He helped enable the short sighted mentality that tore down the firewalls between Main Street and Wall Street, such as Glass/Steagall, dismantled by Bill Clinton and the Republicans, with extensive Democratic complicity.

Krugman was a champion of NAFTA. We not only praised it endlessly, but viciously derided critics, claiming they just hadn't gotten with the program and lacked his economic vision.

Let's not forget Krugman was also a big fan of ENRON and "consulted" for them for $43K while praising them as a "new paradigm" of free market efficiency.

***

Years ago I read and liked Krugman too.

But, the more I learned about his actual record and predictive utility, the more I realized that he's a classic sort of apparatchik, party loyalist, and attack dog. Much as Brooks is for Republicans. He serves that purpose well.

But, he's not capable enough to be a truly independent thinker or economist in his own right. He's certainly not someone you want to rely on for advice.

I think this is as good a post on the situation as any. What isn't explicitly stated in the article or the dialogue is how we got here. I work in the financial services industry and the idea has never change to make as much money as you can as quickly as you can, and that's on the backs of the masses.

In order to accomplish that most effectively, you get in first, you create a market and you profit from the speculative aftermath. We've seen it with the internet bubble and now we've seen it with the housing bubble. The trouble is it came in a very different guise this time, but it amounts to the same thing: the mega-trend. It is something that gets a lot of free attention from the MSM and regular Joes buy into it. That's where the real money is.

Anyway, when it goes on for a significant amount of time, and with markets significant time could mean several years - both the internet and real estate bubbles fit in those timeframes - the people in first make huge cake and bail when they feel they've made enough.

Not sure what's going to be next, but my stomach turns thinking that there are only too many people out there thinking about it and speculating on making it happen. It won't change until regulation creates some sort of oversight.

Good question.

Short-term:
The direct winners would obviously be borrowers who avoid a costly reset for a bunch of years. Ancillary winners would be their neighbors and communities if the freeze helps them to avoid foreclosure.

The losers would be mortgage holding lenders who receive smaller loan repayments than was specified in the original contract.

Longer term:
Many worry that this type of intervention will chill mortgage markets further--if the gov't can renegotiate a contract like this, they say, it creates too much uncertainty for lenders. Possible, but who knows. Courts renegotiate contracts frequently, though this is a lot more sweeping.

The Wash Post, in a fairly muddled editorial today, pointed out that HRC intends this to be "a voluntary plan, worked out with the mortgage industry." Sounds strange to me, and I've only heard the most hostile reactions from the industry to this idea.

Another potential downside is that this plan could just be putting off the inevitable. There are, of course, those who got too far in over their heads re the debt they took on, and the best thing for them and the larger market is to get out sooner than later.

Finally, some view this like a wage or price control, such that after it's released (five years) there will be huge pent up upward pressure on borrowing rates.

Personally, I see all these up and downsides and come out thinking this ain't a great idea. Better to resolve things more quickly with a permanent loan renegotiation or just call it quits if the deal is unsustainable.

No, the biggest difference is the new FINANCIAL OVERSIGHT structure, perhaps the re-installation of Glass-Steagall. Most of the problems of today's close to $1 trllion (yes, that's the safest estimate of the coming meltdown and that's the floor, not the ceiling...) mess stem from the lack of regulations and Wall St gone wild devising new instruments to make money out of thin air, each broker stashing away millions knowing the meltdown will arrive one day.

The rates freeze is a very bad idea now because it's not only the credit crunch that's shattering the economy, there's also the plunging dollar value. If the rest of the world starts shunning the Dollar en masse, it'll definitely go Weimar.

If ARM rates were capped on existing bundled loans wouldn't the mortgage debt paper involved just drop in price overnight on the market, reflecting the reduced value of that paper versus the value of higher interest rate paper? Then the holders would ask the Fed/taxpayer to make up the difference.

At the same time this move would not make the homeowner or speculator whole as they might still owe more than the reduced value of the house, and if they had no down payment, they could send in the keys in spite of it all, as many bought houses more as a quick buck scheme than as a domicile.

Damn right. The mortgage debt, including the subprime slime, was "securitized"--bundled with other IOUs and sold to investors, many of whom weren't aware of what was toxic and what wasn't. Rating agencies that should have pointed this out, missed it.

The rest is history in the making.

Well, I don't want to overdo this. Paul K is one of the most important progressive voices in the world, and not just on econ policy, but on the war too.

When he goes on vacation, I really miss his column, and how many writers can you say that about?

And he's right: HRC has a lot of good ideas too--her health plan trumps Baracks, eg.

I just thought he uncharacteristically missed some good stuff in O's speech.

Well, Obama does offer (quoting from last week's speech):

"For homeowners who were victims of fraud, I’ve also proposed a $10 billion Foreclosure Prevention Fund that would help them sell a home that is beyond their means, or modify their loan to avoid foreclosure or bankruptcy."

How does this differ from Clinton's proposals to go further than the Dodd bill?

rjpjr: You really think that "The FHA should stand ready to be a direct buyer..." is such a big deal? I think you're way overstating it.

Frank/Dodd is a much bigger deal. It's active legislation that the D's will be trying to move soon, I'm sure.

If it fails, and it will be many months before that is known--the HOLC, upon which its based, was around for years--and believe me, by then everyone will be suggesting alternatives.

And btw, how will we know if this alternative is to be invoked? HRC's expert panel--Greenspan, Rubin, and Volcker--will tell us. How you like them apples?

You're trying way too hard to create differences that aren't there. The big difference that is there is her five year freeze, not this idea which may never even be invoked.

So...does that make you a non-liberal elite who thinks they're always right?

:)

Just wondering.

I see, writing a very fair and thoughtful responsive criticism of an article that purports to find differences between HRC and BHO where they really don't exist, and gives one candidate (HRC) the benefit of every doubt while giving the other (BHO) the benefit of no doubt and the burden of pejorative skepticism, and which is otherwise full of ad hominum argument by assertion"" (which is very unusual for Krugman, at least prior to this campaign), and someone calls that being a "crybaby"?

What has gotten into the water in the Democratic party lately? James Carville thinks loyalty is so important that he rants on the decision of an honorable man (bill Richardsson) to endorse the other candidate as an act of Judas (as if Hillary is Jesus, I suppose) -- on the theory that he owed it to the Clintons to remain silent (even if his conscience told him to do otherwise); Clinton zealot Taylor Marsh goes to Huffington Post to threaten the "Democratic Elite" that the rabid Clinton supporters who frequent her violently anti-Obama website will vote for the GOP againt against Obama in November, or sit it out, apparently because the toothless windbag, Pat Leahy, announced yesterday that wants Hillary to give it up (which, even as an Obama supporter, I think is complete bullshit at this point, before PA, NC and IN are decided) -- comments which, sadly, are much like his empty threats to exercise
oversight over the Bush Administration, and, oh yeah, Taylor is just totally worked up about those horrible moral issues about Obama that are raised by that Rev. Wright tape loop (which she harps on over and over and over) -- which, candidly, I find a bizarre form of negative attack coming from surrogates for a candidate who has lived (for a much longer time period than Obama has been a member at Trinity United Church) with a moral train wreck of adultery, lying and public humiliation without leaving that particular church (of course, I am talking about the United Church of Bill Clinton) -- which involves an equally complex and pesky moral decision about weighing the bad 5% of someone's life against the better 95% of his life and deciding not to throw out the baby with the bathwater -- I mean seriously, does any democrat truly think Obama is a closet racist and anti-semite (and I am a white, jewish male, age 50)?? Fuck no (and I really doubt Taylor Marsh does either, whih is why her rants are doubly irritating); and Clinton supporters troll the internet calling any criticism of Hillary whining, lying, crybabying, etc. as if there is something wrong with objecting to unfair attacks.

And, in turn, Obama supporters do a pretty good reverse mirror image of this themselves, in a manner that lacks all the grace that Obama himself has shown in talking about Mrs. Clinton (and which thereby undermines him and his positive message), and is guarantied to stoke the fire. And even if some think the response is justified because it is in reaction to Clinton campaign tactics that are often dishonest and/or insult the intelligence, these attacks against Clinton are equally corrosive and add to the negative energy that is threatening this election, and that also involves the same violent emotions that prolong the agony -- all of which is far more intense than anything the candidates themselves are saying about one another.

Take a big fucking chill pill, people. I fully plan to vote for Hillary if Obama loses this nomination, and my wife, who is as virulent a Clinton supporter as anybody I know, would absolutely vote for Obama and support him in the fall if he wins the nomination. I say this even though I think it would be a terrible unfairness if things continue as they have for the past few months and party elites associated with the Clintons hand the nomination to her even though Obama is more than 100 delegates ahead in the the pledged delegate race -- and I fully understand why Clinton supporters, including my wife, are pissed off at comments like Leahy's, that she should give it up now, after winning the popular vote in 3 of the last 4 primaries, which are just ridiculously out of line. I think it's fair for Leahy to suggest (as others have) that the campaigns, and more importantly, their supporters, should tone down any unfair, or violently negative attacks, and to chill out, because the real enemy is not Obama or Clinton, the real enemy is the right wing of the GOP that has controlled our government for far too long. So even I find her campaign's tactics reprehensible (and her choice of Penn and Wolfson to lead the charge revealing in a very negative way about the type of leader she would be), I will still vote for her and try to convince others to do so. The fact is, I think she hurts herself with these tactics, and that while they may occasionally work (as they did when she conflagrated the NAFTA story in OH a few days before the primaty there), more often they blow up on her, as her "ëxperience" attacks have blown up on her in the aftermath of the Bosnia gaffe, and that Obama will do just fine defending himself against anything truly unfair (he's much better at defending himself than his surrogates are). I think he should be allowed to defeat her on the playing field, without interference, rather than party leaders bullying her out of the race while it is still relatively close and the voting process hasd not yet ended. Obama sees this and iunderstands it, and is not afraid of it, and his supoporters need to start seeing it too.

So yes, I do wish HC would tone down the kneecapping efforts, but she has earned the right to be in this campaign, and Obama beating her fairly and squarely will be an important part of the tonic that helps heal the party. My daughters may be harder to convince if Hillary is the nominee -- they both support Obama and aren't used to this type of violent invective, so they may be a tad more embittered if HC takes the nomination after being behind at the end of the voting process -- but I think even they will come around if it plays out that way. And I wish Obama supporters would stop fueling the fire with their violent invective also. Let it play out. The best way to end this is voter rejection of one candidate or the other -- if that is the force that ends this, it would be the most effective and most democratic endgame, and that rejection, I think, is becoming more and more inevitable.

So take a deep breath until it happens. And if you are in a state that hasn't voted yet, and you want this to stop, vote for the candidate whose victory will make it stop -- and I am quite sure you knows which one that is.

dhs, you make some very interesting suggestions. Thanks for injecting this into the discussion.

Regarding the mortgage interest deduction (your points 5 and 6), I would like to see this eliminated entirely. It is considered a "sacred cow", politically, as it is allegedly a big benefit for the middle class, giving them the opportunity for home ownership. But the reality is that it benefits the very wealthy disproportionately.

A person of modest means, who buys a modest home, will barely reach the threshold of itemizing deductions, based on the amount of mortgage interest he's paying. (In other words, the standard deduction on the 1040EZ will be the same amount or larger.)

But the very wealthy, who buy homes costing half a million dollars and more, are subsidized in their McMansions by the hard working taxpayers of this country. That makes no sense at all. If they can't afford those huge houses, then they shouldn't buy them! Why should you and I help pay for them to live there?

So I say NO MORTGAGE INTEREST DEDUCTIONS, period. And yes, you'd have to phase this out over time.

I like many of your other suggestions, especially those designed to make speculation in the markets a little less attractive. People who make their money as traders don't really add much value to the society, overall. So they should definitely pay their fair share of taxes.

-- ARG

I want to add that fiscal policies constitute one side of the coin, there's also the possibility of domestic stimulus that Obama can propose, particularly in a recession. Economic stimulus is different from creating bubbles as it targets constructive investment in the domestic economy, eg. shoring up the hi-tech industry base, investment in goods and services that are in demand domestically and in the rest of the world. Eg., energy efficiency and green technology are good areas for investment. The problem is Big Oil will object as it erodes their business, and they're a powerful political force to contend with.

I also don't think that Krugman's article was so bad and too critical of Obama. It is actually better for Obama to adopt a cautious tone because the markets are rattled and will react unnecessarily to any overt proposals. What's needed now is calibrating, i.e. you need to keep a very delicate balance of currency devaluation, inflation, easing the credit crunch, deflating the bubble without letting any of it veer out of control. Accept the pain, but ease it and plan for recovery and prevent future financial atrocities.