A Policy That Both Obama & Romney are Right About

It's not often that two presidential candidates agree on much of anything.  That's not good politics!  But I digress. 

Two weeks ago I wrote a blog post titled, Why Obama and Romney are Both Wrong About the U.S. Economy.  In this blog post I stated my basic premise that the U.S. economic model of the past 40 years is broken and cannot be fixed with the trite solutions offered by both parties.  It reminds me of the beer commercial where two groups of men shout at each other, "Tastes great" and the other group shouts "Less filling."  Rather than these trite slogans our major political parties shout at each other their equally trite slogans: "More government programs", "Less taxes" with no one listening to the other side's argument.  Kind of sophomoric isn't it?  

In this previous blog I outlined that there are only five ways to stimulate the economy: 

1. Increase exports
2. Decrease imports
3. Increase business investment
4. Increase government spending
5. Increase consumer spending

I discussed each of these five ways to stimulate the economy but quickly came to the conclusion we needed to focus our attention on consumer spending because historically 70% of our economy is driven by consumer spending. 

Many economists believe that excess household debt is the biggest factor holding back the economic recovery as 25 percent of all homeowners owe more on their homes than they are worth.  When you add the amount of credit card, auto loan and student loan debt to this mix the American public is awash in personal debt.  This leads to a situation in which people are trying to spend less than their income to get out from under their debt load.  And without consumers spending money the chances for a robust economic recovery go out the window.

A recent proposal that could change all this has been presented that has surprising support from both presidential candidates.  Romney advisers and the president are both in favor of allowing homeowners with little or no equity in their homes to refinance their mortgages.  With interest rates at historical lows this would substantially lower their interest payments with the potential of providing a major boost to the economy.  There are 80,000 households in Oregon that could benefit from this proposal.  Logically, why wouldn't you be in favor of lowering the interest rate on underwater borrowers?  It's a no brainer.  In many cases, these homeowners did everything right, but they are unable to refinance to today's lower mortgage rates.    

But Edward DeMarco, the acting director of the agency that oversees Fannie Mae and Freddie Mac, has refused to move on this proposal put forward by the Obama administration.  He believes that it would be a net loss to taxpayers, a conclusion not supported by his own staff's analysis which showed a net gain.  And of course Republicans and Democrats are squabbling over what to do about this impasse.  So nothing gets done as Congress adjourns for its summer recess.       

Admittedly this is a proposal by the Democrats in Congress.  Wouldn't it be refreshing if the Republicans would set aside partisan politics to support this legislation for the good of the American public (by the way there are plenty of other examples of Democrats acting childish too).  This legislation has the potential to spur the economy so that us all would benefit without costing the taxpayer a dime.  If Mr. DeMarco remains a roadblock, then its time to find his successor.

Source: Debt, Depression, Demarco: Lay the blame where it belongs by Paul Krugman, The Oregonian, August 4, 2012; Once again: Why not help people keep their homes? by Peter Buckley, The Oregonian, August 6, 2012.