Citizens Beware: Paulson Is Here to Help

By John Tamny

Ronald Reagan used to say that, “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” Reagan’s words ring true given Treasury Secretary Henry Paulson’s reiteration this week that, “the housing market downturn is the biggest challenge to our economy,” and that there is much “Congress can do to help America’s homeowners.”

First the facts. Notwithstanding all the hysterical commentary from various quarters about what problems in the subprime-mortgage space will mean for the U.S. economy, it’s still true that the actual numbers don’t support those claims. As Brown Brothers Harriman’s Marc Chandler noted in a client piece this week, subprime mortgages account for “about 1/8th of the U.S. mortgage market and a little more than 1/8th are delinquent.” Chandler points out that as 1/64th of the $13 trillion mortgage market is potentially in default, “we are still talking about a relatively modest hit to the large, diversified U.S. economy.”

Instead of letting markets tackle what remains a small problem, Paulson has carved out what he deems “an appropriate role for government” to bring the private sector together in hopes of “achieving beneficial solutions for all parties involved.” What’s missed here is that if beneficial solutions actually exist, private interests very much driven by market signals would be the first to know what these are, and would act accordingly.

In describing his three-part plan to fix the alleged housing crisis, Paulson states that “we will need an aggressive, systematic approach to fast-track able borrowers into a refinance or mortgage modification.” He adds that this, part-three of his plan, will not “include spending taxpayer money on funding or subsidies for industry participants or homeowners.” Perhaps it won’t, but pity the poor shareholders who do pay taxes, and who will see their government craft another way to fleece them through reduced mortgage payouts in order to fix something that may have electoral implications in 2008. One can only wonder how many financially sound homeowners will “fast-track” themselves into what Paulson deems “mortgage modification;” all this with the blessing of the federal government.

Furthermore, taxpayers certainly fund Paulson’s Treasury along with the Department of Housing and Urban Development(HUD). Both entities got together to form HOPE NOW, which includes a nationwide letter campaign to inform mortgage holders of looming payment resets, HOPE NOW servicers trained to contact those with resets in their future, plus a 24-hour, toll-free number for homeowners to call that will “provide vital mortgage counseling in multiple languages.” Paulson adds that the Bush Administration has “requested funding for NeighborWorks America and other non-profit mortgage counseling operations,” not to mention the HUD-initiated “FHASecure” so that “an estimated 240,000 families can avoid foreclosure by refinancing their mortgages under the FHASecure plan.” So much for responsible taxpayers avoiding paying for the mistakes of others.

If we ignore the extra-constitutional nature of all of the above activity, governmental efforts to help the financially strapped might be a little less offensive if the federal government wasn’t already seriously immersed in the subsidization of those who’ve chosen homeownership. But in reality, homeowners already receive a tax deduction on the mortgage interest they pay, for the most part are able to sell their houses free of capital gains taxes, plus quasi-governmental agencies Fannie Mae and Freddie Mac provide a liquid market for the very mortgages that enable ownership to begin with. Paulson wrings his hands over the potential negative economic implications of a housing slowdown, but in concentrating on the “seen,” he ignores the “unseen;” particularly what the economy might look like if taxpayers weren’t forced to fund the “noble” intentions of politicians on both sides of the aisle when it comes to offering the dream of homeownership on the backs of others.

To talk about the “moral hazard” involved when it comes to the federal government protecting homebuyers from all manner of market uncertainty is at this point stating the obvious. Scarier perhaps are the long-term economic distortions that will reveal themselves thanks to a political class seemingly willing to do anything to prop up the housing market.

Memory says equity investors caught by a bear market earlier in this decade weren’t coddled as much, and as such, the message presently being sent to investors is to park cash in property as opposed to stocks. Innocuous at first, until we consider that tomorrow’s entrepreneurs are fully reliant on the savings of others. Simply put, capital invested in property is just that, as opposed to savings and investment that fund the various established firms and entrepreneurial concepts that employ us. If allegedly benevolent politicians make housing sacrosanct such that market uncertainty is a thing of the past, this will eventually materialize in tighter credit for the commercial entities in our midst that create real wealth.

In his speech on Monday, Henry Paulson said, “Nothing is worse than doing nothing.” That may be true in the private sector, but when the government seeks to do something, particularly with elections near, the citizenry should be wary.

John Tamny is editor of RealClearMarkets and Forbes Opinions, a senior economic adviser to H.C. Wainwright Economics, and a senior economic adviser to Toreador Research and Trading ( He can be reached at

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