Kudlow’s Money Politics

Help Is On The Way

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.

Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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