Obama's bad credit

Monty Python used to do a sketch in which an actor was interviewed about the difficulties of his job. The actor complained about the length of the scripts he had to memorize. “But surely there is more to the difficulty of a part than just the number of words.” “Oh yes,” replied the actor, “getting them in the right order is every bit as important.”

Same is true in politics. Bill Clinton never recovered from his decision to do healthcare before welfare reform. Did President Obama repeat that mistake by putting his stimulus plan ahead of financial reform?

Fed Chairman Ben Bernanke testified to Congress this week that recovery depends on the restoration of credit markets. Yet it is precisely on this most urgent issue that action has been slowest. The big stimulus bill passed in record time. A plan to relieve distressed mortgage holders has been announced. But nearly half a year after Lehman Brothers failed, four months after the election and six weeks after Inauguration Day, the Obama administration still has not got its arms around the credit problem.

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The mortgage plan for example has its promising features. But it does not provide for any write-down of mortgage debt—only a relief in the monthly payment on that debt. These debts will remain on the books of banks in full, clogging any new lending. The huge cost of the Obama plan will buy some lucky individuals some relief, but will contribute little to solving the national crisis.

What's most needed is a vast national write-down of bad debt, with the costs distributed among lenders, borrowers, and the federal government.

Former Federal Reserve governor Larry Lindsey has offered a compelling idea: Since we are spending trillions on debt relief anyway, let's concentrate the money where it will do the most good. Offer every homeowner in the country—punctual as well as delinquent, those with positive equity as well as those with negative—a federal mortgage refinance. The federal government will discharge your existing mortgage and offer in its place a 30-year fixed amortizing loan at 4.5 percent. Not only would such a deal reduce payments for many (probably most) homeowners, it would remove almost all mortgages from banks' books, allowing them to tidy themselves up to borrow new funds and resume lending.

The catch for the homeowner: the new loans would be full recourse loans. Like student loans or child support, they would be collectible through the IRS. No walking away. That provision would screen out most of the fraudsters and liars who got scam loans in the 2000s. Those loans would be written down to zero and the investors who bought them would have to take their losses.

This plan would be hugely costly—but probably no more costly than what we are doing now. Above all, however, it would be fast. In the same way as the previous best conservative alternative to the Obama stimulus plan—a payroll tax holiday—was fast. Speed is what the country needs from economic relief plans. And Republican plans that feature speed would nicely contrast with Democratic plans that use the national economic emergency instead to advance the party's interest-group agenda.

The measures the Democrats have been most eager to pass first are the measures the nation needed least. The measures the nation needs most are those that are taking longest. The responsibility for acting is now President Obama’s. And to him, too, will fall the political consequences of delay.