During the Oct. 7 presidential debate, Sen. John McCain made a surprising policy announcement. After long claiming that it was “not the duty of government to bail out and reward those who act irresponsibly,” McCain said he would “order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes.”
McCain’s initial plan would have forced lenders to “recognize the loss that they’ve already suffered,” but he flip-flopped overnight to place the bill back on the taxpayers. His plan now rewards bankers who made bad loans by directing the federal government to buy bad mortgages at their original market value, instead of at their current depreciated value. Here’s how McCain’s proposal works:
— If a homeowner bought a house for $300,000 – and the value then fell to $200,000 – McCain would have the government purchase the mortgage for $300,000, instead of forcing lenders to accept the loss and renegotiate the loan.
— The only way in which the government then makes a profit is if the house’s value rises above its original market value of $300,000, which is possible, but unlikely.
McCain’s housing plan is so bad that even the Bush administration won’t endorse it. Steve Preston, Bush’s Secretary for Housing and Urban Development, criticized McCain’s plan last night:
Republican presidential candidate John McCain’s plan to have the government pay the difference between the balances of troubled mortgages and what homes are now worth is troubling, the secretary of Housing and Urban Development said Monday evening.
“I have a very grave concern about that,” said Steve Preston, who took over at HUD in June after leading the Small Business Administration.
In response to a question during a forum at Town Hall in Seattle, Preston said the problem is that the plan would put the loss on taxpayers, “when the financial institution took that risk.
“I don’t think we can suffer that big of a loss. … That is not invested money. That is just a loss.”
Preston is right. Instead of having the lenders take a haircut in order to avoid mass foreclosures, “McCain wants the taxpayers to bear all the costs of doing so.”
And yet, on the campaign trail, McCain hypocritically rails against others for engaging in “socialism.” McCain’s version of socialism involves having the public accept the losses when the private market fails.