Subprime Obama
Source News for Social Justice Activists
Date 08/01/29/07:02

Subprime Obama

[from the February 11, 2008 issue of The Nation]

LAST YEAR, FORTY-THREE states reported increased home
foreclosure rates. Nevada led the way for eleven
consecutive months; in Clark County, which includes Las
Vegas, nearly one in twenty homes is in foreclosure.
Whole blocks have been foreclosed in Chicago.
Nationwide, rates are nearing Depression-era highs--
ravaging working- and middle-class neighborhoods that
fell prey to the soft sell and outright chicanery of
predatory lenders in the heyday of the housing boom.
These lenders have targeted the most vulnerable--black
and Latino borrowers have been twice as likely to
receive subprime loans as whites; female homeowners, 30
percent more likely than male; black women, five times
more likely than white men.

As the subprime mortgage debacle drives a recession
that threatens financial markets around the world, the
Democratic presidential candidates are pushing plans to
address the crisis. John Edwards and Hillary Clinton
are pledging substantial federal resources to stabilize
the mortgage market and intervene on behalf of
borrowers. Barack Obama's proposal is tepid by
comparison, short on aggressive government involvement
and infused with conservative rhetoric about fiscal
responsibility. As he has done on domestic issues like
healthcare, job creation and energy policy, Obama is
staking out a position to the right of not only
populist Edwards but Clinton as well.

Edwards's plan includes a mandatory moratorium on
foreclosures, a freeze on rising interest rates for at
least seven years, federal subsidies to help homeowners
keep up with payments and restructure loans, and
explicit measures to rein in predatory lenders and
regulate the financial sector. Clinton's plan is
weaker--a voluntary moratorium, a shorter freeze, less
commitment to new regulations--but she has promised $30
billion in federal aid to help reeling homeowners and

Only Obama has not called for a moratorium and
interest-rate freeze. Though he has been a proponent of
mortgage fraud legislation in the Senate, he has
remained silent on further financial regulations. And
much like his broader economic stimulus package,
Obama's foreclosure plan mostly avoids direct
government spending in favor of a tax credit for
homeowners, which amounts to about $500 on average,
beyond which only certain borrowers would be eligible
for help from an additional fund.

"One advantage to the tax credit is that there's no
moral hazard involved," one of Obama's economic
advisers explains. "There's no sense in which you're
rewarding someone for taking too big a risk. If you
lied about your income in order to get a bigger
mortgage, then you're not qualified. Do you really want
to give a subsidy to the guy who wasn't prudent?" Obama
has used similar language on the campaign trail.
"Innocent homeowners," he has promised, those
"responsible" borrowers "facing foreclosure through no
fault of their own," would get help restructuring their
loans. But no such luck for those "claiming income they
didn't have" or "lying to get mortgages."

"There's been less emphasis from the Obama campaign on
the really dysfunctional role of the financial industry
in the subprime mess," says Josh Bivens of the Economic
Policy Institute. "Edwards and Clinton talk much more
about regulation of the financial industry going
forward, and to the extent that blame is placed, they
tend to place it on the lenders for steering people
into loans they couldn't afford."

Obama's disappointing foreclosure plan stems from the
centrist politics of his three chief economic advisers
and his campaign's ties to Wall Street institutions
opposed to increased financial regulation. David Cutler
and Jeffrey Liebman are both Harvard economists who
served in the Clinton Administration, and they work on
market-oriented solutions to social welfare issues.
Cutler advocates improving healthcare through financial
incentives; Liebman, the partial privatization of
Social Security.

Austan Goolsbee, an economist at the University of
Chicago who calls himself a "centrist market
economist," has been most directly involved with
crafting Obama's subprime agenda. In a column last
March in the New York Times, Goolsbee disputed whether
"subprime lending was the leading cause of foreclosure
problems," touted its benefits for credit-poor minority
borrowers and warned that "regulators should be mindful
of the potential downside in tightening [the mortgage
market] too much." In October, no less a conservative
luminary than George Will devoted a whole column in the
Washington Post to saluting Goolsbee's "nuanced
understanding" of traditional Democratic issues like
globalization and income inequality and concluded that
he "seems to be the sort of fellow--amiable, empirical,
and reasonable--you would want at the elbow of a
Democratic president, if such there must be."

Robert Pollin, an economist at the University of
Massachussets, believes "these three advisers generally
reflect Obama's very moderate economic program, similar
to Clintonism." Wall Street apparently has come to a
similar conclusion. Obama had received nearly $10
million in contributions from the finance, insurance
and real estate sector through October, and he's second
among presidential candidates of either party in money
raised from commercial banks, trailing only Clinton.
Goldman Sachs, which made $6 billion from devalued
mortgage securities in the first nine months of 2007,
is Obama's top contributor. When asked if Obama would
hold these financial institutions accountable for
losses incurred by homeowners and investors, his
campaign refused to comment.

But tax credits and continued deregulation won't solve
the mortgage crisis, which threatens to dispossess more
than 2 million homeowners this year. "There's no
evidence that an unregulated market is going to be a
stable market," Pollin says. "The unstable mortgage
market is one indication of that. This is not anything
new. What is new is that you have a serious
presidential candidate who isn't really talking about
it and doesn't have advisers that are prepared to deal
with it."

If Obama is serious about his community organizing
roots, then he would do well to take a lesson from
groups like the Rainbow/PUSH Coalition and ACORN, which
are calling for a moratorium on foreclosures of a year
or longer and for the creation of a massive government
loan agency on the scale of the Reconstruction Finance
Corporation of the 1930s. "We need some serious federal
government intervention to restructure loans, not
repossess homes," says the Rev. Jesse Jackson. "Because
it's not just the borrowers anymore, it's the economy
itself. We're in for a very difficult economic season."

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