Saturday, March 29, 2008

Obama's economic plan

Senator Barack Obama has developed a comprehensive economic plan for America. It's more detailed than the plans offered by the other major candidates, albeit not that different from senator Hillary Clinton's plan insofar as you can tell considering that hers is less specific. Senator John McCain's economic plan seems to be the perpetuation of president George W. Bush's failed economic policies -- cut taxes and reform Social Security.

Obama details six principles for modernizing the financial regulatory system:
  1. Provide the Federal Reserve with basic supervisory authority over any financial institution to which it may make credit available as a lender of last resort.
  2. Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions.
  3. End our balkanized framework of overlapping and competing regulatory agencies.
  4. Regulate financial institutions for what they do, rather than who they are.
  5. Crack down on trading activity that crosses the line to market manipulation.
  6. Identify systemic risks to the financial system, no matter where they arise.
These are sound principles and Obama elaborated on them in his recent speech on Renewing the American Economy.

Obama also has a plan for Protecting Homeownership & Cracking Down On Mortgage Fraud (PDF). It too is detailed and has some good ideas that could be effective for dealing with the home mortgage crisis at hand. However, there are a couple of questionable components to this plan. He bases his plan to help homeowners facing foreclosure on the claim that:
One of the biggest problems associated with the crisis in the housing market is the decline in house values, which is putting people's mortgages underwater, meaning that their mortgage is worth more than their houses. Many people who find themselves in this situation simply walk away, worsening the foreclosure problem.
There is a basic weakness to this precept. The reason homeowners are facing foreclosure is predominantly because they bought homes they could not really afford using the creative financing instruments that were the hallmark of the real estate bubble. Then when their APR increases, they simply can't afford the new monthly installments, regardless of whether they have equity or not.

It doesn't make sense that homeowners would go into foreclosure simply because their mortgage is "underwater." They would still need a place to live even after foreclosure. They also understand the importance of maintaining a strong credit rating. If they could afford the payments, homeowners would keep their homes even were their valuations less than their outstanding principal. Unfortunately, some of the tactics Obama proposes would not be effective since they're based on the invalid assumption that people face foreclosures because they have negative equity.

Obama also proposes refinancing ARMs with fixed-rate mortgages as a solution to those facing foreclosure. But the reason people got ARMs in the first place is because they couldn't afford the monthly payments on a fixed-rate mortgage with the inflated property valuations that existed at the peak of the housing bubble. The only way to afford a mortgage was using negative amortization loans, and the like, which started out with monthly payments at artificially low rates. These homeowners assumed when the rates got high enough that they could no longer afford the payments, they'd simply flip their house for a big gain that they could use on a down payment for a new home. But with negative equity, how could a financially distressed homeowner be expected to make the payments on a fixed-rate mortgage even if they could refinance?

In spite of these criticisms, Obama's economic plan is fairly good on the whole. There are many good ideas in it. With the next presidential administration still almost a year away, Obama has time to shore up the weaknesses in it before occupying the Oval Office. Besides, most of the unaffordable mortgages could already be foreclosed on by that time.

Monday, March 17, 2008

The real milestone of Paterson's inauguration

All the buzz in the press lately has been about David Paterson becoming the first black governor of New York. That is somewhat significant since there have only been a handful of black governors in US history, although the first one was way back in 1872.

However, I don't think that is the most significant milestone of Paterson's ascension to the governor's office. The real milestone is that Paterson is the first blind governor in US history (actually, there was one other, but he only held the office for eleven days).

Paterson's accomplishment is inspirational to those of us with substantial disabilities. It raises awareness of the capabilities of persons with disabilities to be vocationally successful. If the press were to more widely acknowledge this milestone, it would likely cause more employers to think favorably about hiring persons with disabilities in the future.

Granted, racism is still widespread in America. However, the high unemployment rate of persons with disabilities indicate that they face more discrimination than African Americans do.

Sunday, March 09, 2008

A hearing without a crime

President Bush is waging a war in Iraq that some say will cost our treasury $2-trillion when all is said and done. Meanwhile the economy is tanking here at home. Yet our congress can find nothing better to do than to stifle free enterprise.

The oversight and government committee from the House called a hearing on CEO compensation packages Friday. The chairman of the committee, Henry Waxman (D), clearly appeared convinced that he had a criminal lineup in front of him: Angelo Mozilo, founder and CEO of Countrywide Financial; Stan O'Neal, the former CEO of Merrill Lynch; and Chuck Prince, former CEO of Citigroup. Waxman's problem was that it is not unlawful for a CEO to be compensated with an income many times greater than that of their lowest paid employees.

Nonetheless, that did not stop him from asking questions like, "When companies fail to perform, should they give millions of dollars to their senior executives?" Stan O'Neal easily explained this away with assertions like "The reality is that I received no severance package. I received no bonus for 2007, no severance pay, no golden parachute. The amount discussed in the press consisted mainly of deferred compensation, stock and options that I earned during the years prior to 2007."

The committee also wanted to know why Angelo Mozilo sold many of his shares in Countrywide shortly before their values plummeted. Mozilo responded that, "The goal was to reduce my holdings because of my retirement ... almost all my net worth was in Countrywide." He was following the most basic rule of investing: diversify your portfolio. Mozilo made it clear that he was completely transparent about his divestiture so shareholders new that he was selling Countrywide stock -- they were free to use that information as a warning that they should be selling theirs at the same time if they wanted to.

As would be expected in this political environment, the hearing was partisan in that it was the Democrats trying to find something to pin on the CEOs. But there was no allegation of predatory lending practices by any of their firms. In fact, in all of the acts that the left side of the committee claimed the CEOs had perpetrated to try and shame them, not one was illegal.

At least the GOP members of the committee showed some sense. Representative Darryl Issa from California wrapped up the hearings nicely when he stated to chairman Waxman, "Mr. chairman, I look forward to finding if something is wrong here. So far you haven't found it."