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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

Supply-Side Battle



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How About Reagan and Thatcher?



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Washington and Wall Street are all atwitter over Alan Greenspan’s new book, The Age of Turbulence. Of course, the mainstream media are headlining Greenspan’s criticism of President Bush and the Republican Congress. Hastert and Company spent way too much and Mr. Bush failed to use his veto pen. Who can argue with that? Supply-siders and all conservatives have made this point.

But Greenspan points a finger at today’s Democrats as well. Greg Ip’s Wall Street Journal article, ’Greenspan’s Dismay Extends Both Ways,’ makes this case.

In an interview with the WSJ, Greenspan remarked that ‘The Clinton administration was a pretty centrist party. ‘
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Goldilocks 2.0



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(My latest syndicated column.)

A batch of economy-wide stats was released Friday morning, covering retail sales, industrial production, import prices, and consumer confidence.

The verdict? It’s a 2 percent economy. Call it Goldilocks 2.0.

Might the current financial turmoil throttle back growth a little more in the next six months? Yes, perhaps. Will there be some negative earnings surprises, especially from financial companies? Sure.

But the bears would have us believe the sub-prime credit virus heralds the end of the world. They are wrong. Remember this: Our free-market capitalist economy is resilient and durable. It has proven time and again that it can take a punch.

Sure, recession probabilities have increased. But so what? We’ve had virtually uninterrupted prosperity for twenty-five years, going back to the supply-side economy and technological boom launched by President Ronald Reagan. Since then, we’ve experienced 93 positive GDP quarters and only 5 negative ones. That makes for a truly phenomenal batting average.

Consider this: Marginal tax rates are low. Inflation is low. Interest rates are low. And the world economy remains strong. The stock market ‘” which I still believe is the best barometer of the health of business and the economic future ‘” has behaved surprisingly well during this difficult stretch of turbulence. In fact, the sum total of the so-called ‘bear assault’ is only a 4.5 percent correction from Dow 14,000 and other index peaks registered two months ago.

Yes, profits are getting sloppy. And yes, there are some credit shocks out there yet to be revealed. However, the Federal Reserve will reduce the cost of money by bringing down its basic target rate on Tuesday. President Bush will veto any Democratic tax hikes. And at the margin, the Iraq War story is taking a turn for the better. Meanwhile, American entrepreneurs are still working hard.

Speaking of next Tuesday, the best thing the Fed can do is deliver a big-bang, shock-and-awe rate cut that would bring the basic fed funds target 50 basis points lower to 4.75 percent. At the same time, it should lob a full percentage point off the discount lending rate, cutting it from 5.75 to 4.75 percent. This would be a confidence-inspiring move for all concerned: borrowers, lenders, businesses, consumers, and mortgage holders. Not only will slashing the cost of money add significant new liquidity to the economy, it will raise asset values across the board.

The Fed also might think about setting up a special facility for non-bank lending institutions that are experiencing a liquidity squeeze. Perhaps also a temporary liquidity facility for commercial paper lenders. The asset-backed commercial paper market is vital to funding many of the daily operations of businesses across the country, and it’s this market that has been hardest hit.

Such monetary front-loading would be very powerful, indeed. However, if the Fed goes small with only quarter-point reductions for fed funds and the discount rate, many investors will have an incentive to withhold money while they wait for interest rates to finally bottom at much lower levels later this year or next. In other words, a timid Fed action might actually prolong and deepen the economic slowdown.

This is not a time for small-ball. It’s time for Bernanke and Company to go big.

And let’s not forget that taxes are just as important as money. President Bush and Treasury man Henry Paulson should absolutely squash all the Washington rumors of tax hikes, in particular a cap-gains tax increase. If investors expect a hike in the cap-gains tax, they will have every incentive to launch a massive wave of stock market selling. Needless to say, this would be utterly calamitous for the whole economic picture.

The animal spirits may have had their wings clipped a bit by the credit crunch, but with the right tax and money policies there is still plenty of sizzle and juice in this story. It’s very easy to be totally pessimistic and bearish right now, but that’s precisely why I will avoid falling into that trap.

Optimists are winners. Pessimists are losers.

Goldilocks 2.0.

The Free Market Hall of Fame



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Just received an email from my old pal Mark Skousen. He’s the founder of FreedomFest, which bills itself as ‘The World’s Largest Gathering of Free Minds.’ They put together terrific, thought provoking conferences out in Las Vegas once a year.

Turns out they’re also putting together a “Free Market Hall of Fame.” It’s a “who’s who” of all the folks contributing most to the success of free markets and free people around the globe.

(Incidentally, yours truly was nominated.)

Categories include:

1. Academic economists
2. Journalists and writers
3. Business leaders
4. Legislators and government officials
5. Think tanks

Click here to vote for your favorite free market advocates.

And remember: Free market capitalism is the best path to prosperity!

Thursday Night Lineup



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On CNBC’s Kudlow & Company this evening:

Bob Pisani will get things started with a recap of today’s action from the NYSE.

MARKETS & THE ECONOMY…Our panel will debate all the latest news and developments.

On board:

*John Rutledge, chairman of Rutledge Capital
*Gary Shilling, president of A. Gary Shilling & Co.
*Michael Ozanian, Forbes Magazine Sr. Editor.

OIL & THE ECONOMY…Gulf Oil CEO Joe Petrowski will join us to discuss.

Our market panel will stick around and weigh in with their perspective.

FED DEBATE…Former Federal Reserve Governors Wayne Angell and Lyle Gramley will take a look ahead at Tuesday’s Fed meeting.

IRAN, IRAQ & PRESIDENT BUSH’S SPEECH TONIGHT…Tony Blankley, editorial page editor for The Washington Times will square off with Joe Cirincione, vice president for national security at the Center for American Progress.

Please join us at 5pm ET on CNBC for another free market edition of Kudlow & Company.
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Free Market Capitalism, 10 Jihadism 0



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That was the theme of our 9/11-anniversary show last night.

A big hats off goes to my good friend ‘Jimmy P’ Pethokoukis from U.S. News & World Report who joined me on set for patching together the following picture on his blog:

“Liquidity Now!”



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Add Harvard economist Marty Feldstein’s name to the growing list of folks calling for substantial Fed rate cuts.

In his WSJ op-ed today, the former chairman of the Council of Economic Advisers under President Reagan wrote:

“The time has come for the Federal Reserve to cut the federal funds interest rate substantially, starting on a path from the current 5.25% to 4.25% and possibly even less. Without such a policy shift, the U.S. economy faces the risk of a significant economic downturn…”

Click here to read it.

Piercing the Fed Temple



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On last night’s Kudlow & Company, House Financial Services Committee Chairman Barney Frank continued putting heat on Bernanke & Company to begin easing rates and adding more cash to the economy. Mr. Frank is calling for a Fed policy shift on two grounds: First, financial markets have seized up and this could spell trouble for the economy. And second, the Fed should be focusing on fighting slower growth rather than inflation.

Mr. Frank is the rare elected official publicly calling for fed rate cuts. For some reason, most senators and House members are reluctant to take on the Fed in public. But Chairman Frank is a big believer that in a democracy such as ours, everyone has the right to speak out on monetary policy. While he clearly respects the Fed’s independence, he doesn’t believe the Fed is on some distant planet absolved from any public criticism. I agree.

The ‘Secrets of the Temple’ — as discussed in Bill Greider’s great book twenty years ago — should be penetrated, especially by elected officials.

As the late economist Jude Wanniski often remarked, money is the most democratic of all economic issues. Everybody has greenbacks in their wallets and purses. Folks have a right to know what the cost and value of their money is. Informed public debate about money can be quite useful to Fed policymakers, other government leaders, and the public at large.

Mr. Frank was also concerned that regional Reserve Bank presidents have an obsessive, built-in bias of slaying inflation at the expense of fostering economic growth. Incidentally, it’s interesting to note that while the seven governors of the Federal Reserve Board are nominated by the President and confirmed by the Senate, the twelve regional Reserve Bank presidents are essentially private sector representatives. They are neither nominated by the executive branch nor confirmed by the Senate. However, they are voting members of the open market committee on a rotating basis, along with the seven governors.

Put simply, of the twelve FOMC votes, seven go to the confirmed Fed governors, one goes to New York Fed head Timothy Geithner (who is a permanent FOMC voting member), and the remaining four votes rotate among the unconfirmed regional presidents who serve one-year terms. So the unconfirmed, regional Reserve Bank president votes are essentially on equal footing as the confirmed Fed governors.

Mr. Frank is on to something here. With the possible exception of San Francisco Fed President Janet Yellin — who has expressed concerns about the economy — it does appear that these reserve bank presidents are focusing almost exclusively on inflation. For whatever reason, Kansas City’s Thomas Hoenig, Dallas’s Richard Fischer, Atlanta’s Dennis Lockhart, and Richmond’s Jeffrey Lacker (and of course, Bill Poole in St Louis) all seem to be opposed to easier money.

Chairman Frank is only looking for a mild easing, instead of a full-scale, open-the-spigots approach. And as the Chairman of the powerful House Financial Services Committee, Mr. Frank does have oversight authority over the central bank. In that important sense, I think he is absolutely right to speak out.

If Barney Frank is rocking the monetary boat, then so be it.

Jack Welch on Kudlow & Company Tonight...



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Legendary GE head honcho Jack Welch will be joining me for an in-depth, big picture interview on tonight’s show.

Welch is arguably the greatest business figure of his generation. It’s always a great honor to have him on as a guest.

We’ll of course discuss what’s going on in the stock market & economy, some politics, as well as get his insight on where America stands on the anniversary of the tragic events of 9/11.

Please join us on CNBC tonight at 5pm ET…

Monday Night Lineup



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On CNBC’s Kudlow & Company this evening:

Bob Pisani will deliver an update on today’s market action from the NYSE.

MARKETS/ECONOMY…Our market pros will discuss and debate all the latest news and developments.

On board:

*Michael Metz, chief investment strategist at Oppenheimer & Co.
*Noah Blackstein, portfolio manager at Dynamic Mutual Funds
*Dr. Bob Froehlich, Vice Chairman & chief investment strategist at DWS Scudder

***Jim Nussle, the new Director of the Office of Management and Budget will join us from the White House North Lawn with a look at what’s ahead.

LIEBERMAN INTERVIEW…Sen. Joe Lieberman (I-CT) will offer his keen insight on today’s Senate testimony from Gen. David Petraeus & U.S. Ambassador to Iraq Ryan Crocker.

WASHINGTON TO WALL ST…Rep. Barney Frank (D-MA) House Financial Services Committee Chair will join us in a one-on-one interview.

DYNAMIC DUO…On to duke it out are Robert Reich, former Clinton Labor Secretary and Steve Moore of The Wall Street Journal editorial board.

Please join us at 5pm ET on CNBC for another free market edition of Kudlow & Company.

Now Is The Time



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A simple yet overlooked thought in the current debate about the health of the economy, the subprime credit virus, and the proper role of Federal Reserve monetary policy is this: you don’t have credit blowups, liquidity freezes, dysfunctional commercial paper markets, suspect bank loan quality — nor do these ailments spill over into London and European money markets — when central bank policies are easy and accommodative.

Financial panics and overly stressed markets are symptomatic of tight and restrictive money. In other words, the current story of financial fear, trembling and high anxiety is itself a critically important signal that money is way too tight.

Economists are always on the hunt for indicators to determine whether central banks are fostering liquidity shortages or liquidity excesses. They look at currencies, commodities, bond rates, and a host of other price indicators. One such indicator in the economist’s arsenal demanding attention is the current financial state of extreme risk aversion, cash hoarding, and utter lack of financial confidence. More than any other gauge, it is today’s financial panic that unequivocally signals to the Fed (and perhaps the Bank of England and the ECB) that something is wrong with money.

In an important sense, this is all these bankers need to know in order to understand why their policies are off course and inconsistent with financial stability and economic growth.

Friday’s disappointing jobs report pounds this point home (though in my judgment, a one-month’s jobs decline is not in and of itself a major development — nor does it necessarily foreshadow a recession.) But the unexpected loss of 4000 corporate payroll jobs (the first on drop in four years) plus a very unsettling 316,000-drop in the household jobs survey is of course consistent with the recent shocks to our financial system.

So were the 81,000 downward revisions to the prior months’ of June and July. Incidentally, the only reason unemployment held firm at 4.6 percent is a 340,000-drop in the civilian labor force. This undoubtedly signals worker discouragement and declining labor morale.

After President Bush slashed tax rates four years ago, many of us argued that the rising household survey of jobs gains was a good leading indicator of more work and lower unemployment. We were right. Both the payroll and the household surveys produced over 8 million new jobs, while the unemployment rate dropped from 6.3 percent to 4.5 percent. That said, year-to-date the monthly change in household employment is actually falling by an average of 16,000. This is a big negative and does not bode well for future job tallies.

There are some saving graces to the economic story. While the Goldilocks, soft-landing scenario is imperiled by the deepening financial squeeze, it is not yet completely dead in the water. Recent numbers from the Institute of Supply Managers show an expanding economy in manufacturing and services. Same store chain sales came in above estimate for August. Personal incomes after tax and after inflation are still rising by 3.8 percent for the twelve months ending in July.

Silver linings aside, the commercial paper market for short term business loans continues its deep south migration with an almost unprecedented $300 billion evaporation. In the months ahead, nearly a trillion dollars of commercial paper will have to be rolled over. It’s hard to say where all this money is going to come from in today’s risk averse environment. At present, investors are more than willing to finance short term Treasury paper at roughly 4 percent, but so-called asset backed corporate paper is going unfunded despite a better than 6 percent return. Exactly the same problem is cropping up in the London interbank loan market as LIBOR rates have jumped nearly a hundred basis points in recent days.

The main point here is that if businesses are unable to access working capital to fund its daily needs, then these firms will be forced to shrink their operations. That means layoffs.

American companies are already experiencing their first profit decline in over five years. Non-financial domestic corporations have experienced negative profit margins and falling profits over the past three quarters. Treasury Department tax collections from business income have fallen off a cliff. Wall Street analyst Dan Clifton revealed that corporate tax revenues fell 29 percent in August compared to a year ago. And these corporate tax collections have now dropped in three of the past four months. A year ago, they were rising by more than twenty percent.

So while big companies are still benefiting from overseas-based profits, the domestic story is rapidly deteriorating. Moreover, it’s a safe bet that the financial sector will deliver downside surprises as today’s mortgage mess continues to unwind.

Unfortunately, not a single one of these critical economic issues came up in this week’s GOP debate in New Hampshire. But make no mistake about it, the financial credit crunch and the economic downturn is going to loom large in next year’s election.

As for the Federal Reserve, it is of course an independent agency. None of its members will be standing in front of voters come November 2008. Nonetheless, it is the Fed, more than any other policy lever that holds the all-important key to our economic future. Disappointingly, so far they have downplayed the disruption in financial markets.

If central bankers would come to their analytical senses, they would appreciate that today’s financial panic is itself sufficient reason to slash the Fed funds target rate by at least a full percentage point from today’s 5.25 percent to something around 4 percent. New cash needs to be poured into the liquidity parched banking system. Such a move would be a much-needed injection of confidence into a rattled marketplace. In addition, a lower fed target rate would not only deliver much needed addition to bank reserves, but would help to raise asset values across the board by dropping the cost of money. A pro-growth Fed policy will actually strengthen the beleaguered US dollar and reduce the price of gold.

Earlier today, former Fed chair Alan Greenspan compared the current financial turmoil to that of 1987’s stock plunge and the 1998 dislocation of giant hedge fund Long Term Capital Management. (And, just for good measure the maestro threw in the land boom collapse of 1837 as well as the bank panic of 1907.) Fortunately, financial panics don’t occur very often. But what we have before us today is a modern version of the old fashioned run on the bank. The only difference is that the bank today is the global money market.

The Fed can fix this. But they better get moving.

Friday Night Lineup



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On CNBC’s Kudlow & Company this evening:

CNBC’s Mary Thompson will deliver a quick recap from the NYSE.

THE MARKETS & THE FED…Our stock market/economic panel will offer their perspective on today’s stock market selloff and what may lie ahead for the economy and investors.

***Former Federal Reserve Governor Wayne Angell will join us in a one-on-one interview.

Other market guests include:

*Michael Panzner, “Financial Armageddon” Author
*Jerry Bowyer, National Review Financial Columnist
*John Browne, MoneyNews.com Editor
*Craig Columbus, Chief Investment Strategist, Advanced Equities Asset Management

DEBATE: TODAY’S JOBS NUMBER & THE ECONOMY…Squaring off will be Joe LaVorgna, Deutsche Bank Chief U.S. Economist & Brian Wesbury, First Trust Advisors Chief Economist.

*US Secretary of Labor Elaine Chao will join us in a one-on-one interview.

WASHINGTON TO WALL ST. DEBATE…Jared Bernstein from the Economic Policy Institute will debate all the latest news and developments with Steve Moore from The Wall Street Journal editorial board.

Please join us at 5pm ET on CNBC for another free market edition of Kudlow & Company.

Last Night’s Steel Interview



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From Reuters:

US Treasury’s Steel sees money markets settling

WASHINGTON, Sept 6 (Reuters) – The U.S. Treasury’s domestic finance chief said on Thursday he was optimistic that money markets would be operating normally by year-end as a liquidity crunch eases and market confidence returns.

Robert Steel, the Treasury’s undersecretary for domestic finance, told CNBC Television, however that it would take a long time for banks to become more comfortable in taking lending risks, and more encouragement was needed.

“I think for now things are working and they’ve improved from where they were at the bottom,” Steel said on CNBC’s Kudlow & Company show. “Basically we believe liquidity is beginning to come back but we’re vigilant and focused on the issue,” he added.

Steel also said that efforts to help financially troubled homeowners restructure their mortgages and avoid foreclosure should be focused on owner-occupants, not those with second homes or properties bought for speculation.

Thursday Night Lineup from Washington



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On CNBC’s Kudlow & Company live from Washington this evening:

Bob Pisani will start us off with a report from the NYSE.

MARKETS…Our market panel will offer their perpspective on the latest stock market and economic news.

*Barry Ritholtz, president of Ritholtz Research & Analytics
*Michelle Girard, senior economist at RBS Greenwich Capital
*Gary Shilling, president of A. Gary Shilling & Company

WASHINGTON TO WALL STREET…On to debate Congress’s private equity tax proposal, the AMT, and more are:

*Rep. Charlie Rangel (D-NY), House Ways & Means Committee Chairman
*Rep. Jim McCrery (R-LA), House Ways & Means Committee Ranking Member

***Joining the debate will be Jared Bernstein, senior economist at the Economic Policy Institute and The Wall Street Journal’s Steve Moore.

ECONOMY & HOUSING……Robert Steel, Treasury Under Secretary for Domestic Finance will join us in the studio for a one-on-one interview.

CAPITOL HILL SHOWDOWN…Mary Matalin, Republican strategist and Dee Dee Myers, Democratic strategist will be on to debate all the latest political news and developments.

Please join us for another free market edition of Kudlow & Company at 5pm ET on CNBC.

The President & Senator Backbone Address Surge Success



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Drudge is featuring a remark President Bush made yesterday during his visit to Australia. Responding to the Deputy Prime Minister’s inquiry of how his recent surprise trip went in Iraq, Mr. Bush told him, ‘We’re kicking ass.’

Well, he’s right. The Petraeus surge is working. (Even the dreary MSM shows signs of finally coming around…)

Meanwhile, Senator John McCain was crisp, clear, and confident in last night’s GOP debate -’” and he was absolutely right on the money about the troop surge’s success in Iraq.

Governor Romney’s line that the surge was ‘apparently’ working was off the mark. It was inappropriate. Kudos to Senator Backbone for calling him out on it and responding that, ‘The surge is working, not ‘apparently.’”

Right on to President Bush and John McCain for hanging tough.

You’re gaining ground.

Wednesday Night Lineup



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On CNBC’s Kudlow & Company this evening:

CNBC’s Bob Pisani will start us off from the NYSE with a report on today’s action.

MARKETS…Our market mavens will offer their perspective on all the latest news and developments affecting the stock market and economy.

On board:

*Joe LaVorgna, Deutsche Bank Chief U.S. Economist
*Elizabeth MacDonald, Forbes magazine Senior Editor
*Joe Battipaglia, Stifel Nicolaus Market Strategist
*Arthur Laffer, Laffer Associates Chairman
*Daniel Clifton, Strategas Research Partners Director

HOUSING UPDATE…CNBC chief Washington correspondent John Harwood will get us started with a quick report.

***Mr. Harwood will be followed by a one-on-one interview with Sheila Bair, chairwoman of the Federal Deposit Insurance Corp.

Our market panel will weigh in with their perspective following the interview.

JOBS & THE ECONOMYThe Dynamic Duo returns…Robert Reich, former Clinton Labor Secretary and Steve Moore of The Wall Street Journal editorial board will duke it out.

(Messrs. Reich & Moore will also stick around to discuss Mr. Reich’s new book, Supercapitalism.”)

Please join us at 5pm ET on CNBC for another free market edition of Kudlow & Company.

Earvin Takes Magic to Washington



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From today’s WSJ:

WASHINGTON — The private-equity industry is taking a new tack in its fight against a bid to raise taxes on fund managers, arguing the effort would harm investment firms owned by women and minorities, and discourage economic activity in neglected areas.

Minority and women business leaders today plan to announce a new group, the Access to Capital Coalition, to oppose a move in Congress to raise taxes on carried interest, a cut of profits that hedge-fund and private-equity managers receive. Among the high-profile business people enlisted in the fight: Former basketball star Earvin “Magic” Johnson, who now is chairman and chief executive of Johnson Development Corp., which invests in bringing businesses into urban areas….


Good for Magic. The most valuable thing for these minority businesses and entrepreneurs is capital. It is the seed corn of future economic growth.

The last thing Congress should be doing is threatening to raise the cost of capital for minority firms investing in low-income areas. Reducing their investment returns is a surefire way of stunting growth in areas thirsting for capital.

Tuesday Night Lineup



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On CNBC’s Kudlow & Company this evening:

CNBC’s Bob Pisani will lead us off with a market drilldown from the NYSE.

THE MARKET…Our market panel will sift through and debate all the latest market news and developments.

On board:

* Jeff Kleintop, chief market strategist, LPL Financial Services
* Herb Greenberg, MarketWatch Sr. Columnist & CNBC contributor
* Stefan Abrams, Bryden-Abrams Investment Management managing partner

THE ECONOMY, FED, INTEREST RATES & MORE…On to debate what lies ahead are John Ryding, chief economist at Bear Stearns and Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

POLITICAL ROUNDTABLE…Our experts will discuss Fred Thompson’s budding GOP campaign as well as other news, trends and developments out of Washington.

On board:

* Larry Sabato, UVA political scientist
* Chris Cillizza, Washington Post political blogger
* Mike Allen, chief political correspondent for The Politico
* John Fund, columnist for The Wall Street Journal’s opinionjournal.com

Please join us at 5pm ET on CNBC for another free market edition of Kudlow & Company.

September Optimism



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Bob Novak’s column this morning talks about “Republican Melancholy.’

Okay, I’m sure there’s a lot of that going around. But on the other hand, President Bush is making some good moves. His surprise trip to Anbar Province is one example, and it highlights the progress from General Petraeus’s counterinsurgency surge.

Here at home, the president is taking steps to help the lower-middle-income working poor to hang on to their mortgages and their homes with an expanded FHA insurance plan and an end to the IRS foreclosure tax on housing short sales.

Meanwhile, Fed chair Ben Bernanke is moving toward a slight easing of policy. Today’s ISM manufacturing report shows growth, not recession.

Incidentally, the stock market actually rose in August, and opened higher in the first day of September trading earlier this morning.

If stocks are optimistic, then so am I.

Help Is On The Way



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Stock markets cheered on Friday after hearing Fed head Ben Bernanke virtually ensure more cash and lower rates from the central bank. And President Bush offered up a modest program for troubled homeowners that could help to stop a potential tidal wave of defaults and foreclosures.

All eyes were on Bernanke at the Fed’s annual summer get-together in Jackson Hole, Wyoming. He told the group and world markets that were listening in that a prosperous economy needs a well-functioning financial market. The Fed stands ready to take additional actions to provide liquidity to offset any negative economic consequences of stressed financial markets. Not for bad decision bailouts of lenders or borrowers, but instead to keep the financial system healthy. Good thinking on his part.

Retired maestro Alan Greenspan would have been more pre-emptive and aggressive than the cautious Bernanke. Nevertheless, expect a 25 basis point rate cut at the next meeting on September 18 with additional quarter point cuts coming after that.

Meanwhile, President Bush got ahead of the political curve by announcing a plan to reform and expand self-financing FHA home loan insurance, develop mortgage-servicing workout plans for decent credit borrowers who may have temporarily fallen behind on mortgage payments, and a three-year moratorium on misguided IRS foreclosure taxes that could otherwise haunt lower income folks who have already lost their real estate property.

With the help of Treasury strongman Henry Paulson, Mr. Bush is identifying ways to provide some modest help to a couple of hundred thousand homeowners to keep the ownership society dream alive. Paulson will continue to work with Ben Bernanke to identify additional areas where Uncle Sam can be helpful. But at the same time, Bush is determined to avoid large-scale government bailout plans from leading Democrats who would like to directly subsidize millions of homeowners in a budget-busting exercise that would create vastly more harm than good.

In particular, Paulson’s idea is to find third-party service organizations who can help cash-strapped homeowners to re-negotiate their loans. In an era when mortgages are owned and distributed to banks all around the world, this old-fashioned workout idea in the new financial world of mortgage securitization is a very positive step. There’s no miracle here for many who over-reached and will face foreclosure. But as any old line banker will tell you, forbearance is much better than foreclosure whenever possible.

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