Robert B. Reich

It’s an old saw that when people are drowning, Republicans throw them a rope so short it doesn’t reach them while Democrats throw them a rope so long it can’t pull them out.

For homeowners in danger of drowning when their mortgages are reset at higher rates over the next two years, the Bush administration’s response is the short rope: Freeze rates for people with good credit histories who are likely to be able to meet the payments at such fixed rates. The idea is fine as far as it goes, but it doesn’t go nearly far enough. Most of the nearly two million families in danger of losing their homes won’t qualify.

Some Democrats, meanwhile, want to throw out too much rope. Take, for example, Hillary Clinton’s suggested temporary moratorium on foreclosures. It may be good for those in imminent danger of losing their homes, but any such moratorium is likely to make banks more wary about offering further mortgages to anyone — even families with good credit histories.

Either way – too little rope or too much – will cause more people to lose their homes or not be able to buy one, further depressing home prices and adding to losses on mortgage-related securities. This means a continuing credit crunch, and that dread combination of recession and inflation called “stagflation,” from which even the Fed can’t rescue us.

So how much rope is just right? A few days ago Alan Greenspan suggested throwing it precisely to the people who are going down. Give direct aid to struggling homeowners analogous to money given disaster victims, so they can meet their payments. It makes sense: Better to bail out families who didn’t know the risks they were taking on, than lenders who had every reason to know. And better to pay the costs now and get this behind us than suffer risks and uncertainties that slow the economy for years.

Greenspan is one who should know, because he’s partly responsible for the mess. A few years ago he made money so cheap lenders shoved it out the door to any borrower who wanted it, and then he forgot the Fed was supposed to oversee lenders to make sure they were acting responsibly. Maybe Greenspan’s new idea is his way of making amends?

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people.

Copyright 2007 Robert B. Reich

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