Democracy does not cultivate a taste for deferred gratification: Politicians eyeing the next election want to give people what they want sooner rather than later. And in a time of economic turmoil, the impulse to do something immediately is even stronger. But the haste is misplaced. In the current climate of panic, policymakers need to learn patience, and they need to learn it right now.
A couple of alleged crises are getting all the attention at the moment. The first is the risk of a recession. The second, not unrelated, is the mortgage meltdown and the credit crunch it has helped to bring about. Just about everyone in Washington agrees that swift action is needed on both.
The scenario brings to mind what the late Ohio State football coach Woody Hayes said about throwing the football: Three things can happen, and two of them are bad. Efforts to micromanage the macroeconomy may be useless, or they may be destructive. In either case, they can impede a painful process that is needed to correct mistakes like the housing bubble.
For all the alarms about a repeat of the Great Depression, it’s not a sure thing we’ll even have a recession, much less a serious one. A recession is technically defined as two consecutive quarters of negative economic growth — meaning total output actually declines. A recent Wall Street Journal survey of 51 economists, however, found that, on average, they expect not shrinkage but very slow growth in the first and second quarters.
One economist interviewed by the Journal suggested that “there might not be even one negative quarter in this recession” — which is the equivalent of a damp drought. Herbert Hoover should have had such problems.
But let’s suppose we face a real downturn. If the federal government can do anything to goose growth, it’s already doing it. The Federal Reserve has slashed interest rates since last summer, and the Treasury is about to start sending tax rebates to 130 million families, who are supposed to rush out and spend it in a flurry of economic stimulus.
It may not work, but we may never know — since even if it doesn’t, the economy will do what it normally does in a recession, which is to ultimately right itself. But the economic stimulus is no longer such an appealing option for Congress and the president, because it has already been done and therefore can’t be done now, which is when they want to be doing something.
Fortunately, the mortgage mess is an excuse for additional intervention, which they can justify in the name of helping homeowners as well as the economy. As it happens, though, an effort to rescue people who can’t pay their mortgages will probably make a bad thing worse.
In the first place, it will slow down what has to happen to bring back the housing sector — which is for prices to drop to a level that will clear out the existing oversupply. In the second, it will shift the burden of bad lending and borrowing decisions from the people who benefited from them to the people who didn’t.
Rep. Barney Frank, D-Mass., is pushing a bill to let the Federal Housing Administration guarantee “at risk” mortgages if lenders agree to reduce the total debt. It might be callous of me to say this approach amounts to rescuing “people who were imprudent and bought more house than they should have.” But I didn’t say it. Barney Frank did.
If the FHA guarantees all these mortgages — up to $300 billion worth, if Frank has his way — it will be putting its trust in people who have already shown themselves to be a bad bet. So taxpayers could end up eating a lot of delinquent loans.
The mortgage problem has had the useful effect of forcing financial institutions to exercise greater care in scrutinizing their customers. A lot of the credit crunch is not a bad thing but a good thing, reflecting a tightening of standards that got way too loose. A bailout, by contrast, can only weaken the lesson we should all learn from this episode.
Acting in a hurry without considering the long-term consequences, you may recall, is how we got into this predicament. Fixing major mistakes is not an overnight task. But in time, foreclosures will subside, the housing sector will return to normal and the economy will regain its usual vigor. Here’s what Washington should do to help: Let them.
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