Reflection Paper #1

Public Policy

 

General Instructions

The reflection paper is an opportunity for you to explore a topic of interest to you in public policy. You will be asked to find critical issues, analyze problems, evaluate them, and develop your own arguments.

 

For reflection paper #1, you will conduct an evaluation of government involvement in mortgage crisis. Specifically, you should write a reflection paper evaluating who is responsible for the 2008 economic crisis and whether the federal government should impose stricter rules on the mortgage industry.

 

Both issues are interconnected so please discuss both.

 

You as a reasoned well-informed thinker, diligent researcher, and good writer should first read materials provided below. And then take your position, develop your own argument, provide evidence that supports your argument, and revise your paper before submitting.

 

Requirements

1. The reflection paper should be 3-4 page in length and be uploaded to the submission folder on D2L. APA format

 

 

Material #1: The 2008 Economic Crisis

 

When the 2008 economic crisis brought with it a credit crunch, plunging home prices, and major problems with subprime (high-risk) mortgages, president Bush and treasury secretary Henry Paulson called for an economic “rescue” package that was promptly called a “bailout” by critics. The bailout frame seemed to be the most resonant one in media coverage as the words

“economy” and “bailout” appeared in over 500 stories in the New York Times from September 7, 2008 (the first major sign of trouble) to December 8, 2008. On the other hand, the words “economy” and “rescue” appeared in less than twenty stories during the same time period. Perhaps not surprisingly, Gallup polls revealed a strong majority of Americans were angry about the financial crisis and four in ten were afraid of what the crisis would mean for the country’s future. Later Gallup surveys (November 11, 2008) revealed that Paulson’s decision to spend most of the congressionally provided $700 billion bailout/rescue on infusing cash into the economy rather than buying up bad mortgages was not popular as most Americans wanted the solution to the financial crisis to focus on tightening regulations and helping homeowners in danger of losing their homes. Americans also seem to believe that there is a difference between “bailing out” Wall Street and “bailing out” the auto industry. The Big 3 American car makers asked Congress for financial assistance to the tune of $25-36 billion in December 2008. Americans were nearly equally divided over the question of whether to bail out the auto industry, perhaps highlighting the difference between helping those with white-collar (financial industry) and blue-collar (auto industry) jobs.

 

 

Material #2: Causes of the 2008 Financial Crisis

• What caused the recession in 2008?
• Federal Reserve Bank lowered interest rates.
  • Firms developed new methods for selling mortgages.
  • The government reduced credit requirements for lower income families so that they could put a smaller deposit on a mortgage.
  • Cheap money, combined with these new “subprime” mortgage instruments, produced a housing boom.
  • In 1999, Glass-Steagall Act was repealed. Act had separated investment from commercial banking that reduced regulation of banks.
• Investment banks began bundling mortgages together combining secure with subprime, or less secure, mortgages and selling them as “mortgage-backed securities.
  • Stimulated home sales
  • Increased book value of homes
  • Homeowners borrowed against increased value of their homes.
  • Homeowners used this equity to buy goods and services within the economy that stimulated economic growth.
• Debt levels for consumers and banks increased.
  • Banks continued to loan money, increasing their vulnerability to any downturn in the value of the real estate market, which was being used to secure the loans.
  • The economy moved into a recession, in part stimulated by increasing fuel costs. Global production costs increased for goods and services, which led to decreased sales.
  • Many homeowners caught in the economic downturn found the estimated value of their real estate had dropped below the value of their mortgages. Many defaulted on their loans.
  • Banks that held these mortgages were told by federal regulators to revalue their holdings. Investors in the banks withdrew their holdings. Many banks and investment companies that supported them could not afford to maintain payments on these investments, so they failed.
  • Consumers’ and investors’ confidence in global economic markets plummeted. Credit markets froze. This led to reduced economic activity and layoffs, which spiraled into a recession.
• Government policy exacerbated this economic crisis.
  • Two government-backed corporations, Fannie Mae and Freddie Mac, owned $5 trillion in mortgages.
  • They were actually owned by private investors.
  • Widespread belief was that they would be backed by the federal government.
  • They had mandated that banks issue subprime mortgages to poor people. Many of these people were forced to default on their mortgages, which they could not afford.
  • The federal government took over the bankrupt Fannie Mae and Freddie Mac.
• Credit Froze
  • Banks afraid of an economic collapse stopped lending money to preserve their existing capital reserves.
  • Industries that relied on credit to finance purchases of their product, home builders, and automobile companies experienced drastic reduction in sales.
  • The collapse of these two market sectors rippled through the remaining sectors of the economy, resulting in widespread reduction in economic activity.
  • Unemployment rose as firms laid off workers whom they did not need, due to reduced production demands.
  • The stock market, reflecting these economic changes, collapsed.
  • S. Securities and Exchange Commission brought charges against investment banks for manipulating subprime mortgages.
  • 2009 Congress passed Wall Street Reform and Consumer Protection Act. This reinstituted regulations that had been removed in 1999.

 

Material #3: Regulating the Mortgage Industry

 

Should the federal government impose stricter rules on the mortgage industry?

 

YES

Sen. Christopher J. Dodd, D-Conn.

Chairman, Senate Committee on Banking, Housing and Urban Affairs

From a statement to the committee, Oct. 3, 2007

 

Today we are facing a serious meltdown in the subprime mortgage market. This crisis is the equivalent of a slow-motion, 50-state Katrina, taking people’s homes one by one, devastating their lives and destroying their communities. As a result, 2.2 million families are in danger of losing their homes to foreclosures at a cost of over $160 billion in hard-earned home equity that should have been available to finance college educations, pay health-care expenses or [act] as a cushion against uncertainty.

President Bush and his administration need to get fully engaged. They need to press subprime servicers and lenders to modify loans into long-term, affordable mortgages. Where modifications are not possible, the administration must work with Fannie Mae and Freddie Mac to refinance troubled borrowers on fair and affordable terms.

In April, I convened a Homeownership Preservation Summit where a number of the largest subprime lenders and servicers pledged to do these modifications. Unfortunately, a recent report tells us that just 1 percent of subprime adjustable-rate mortgages have been modified. This is wholly inadequate, and the administration must work with us to press the lenders and servicers to live up to their obligation.

While we are focused today on how we can rescue homeowners that have been victimized by predatory practices, we are also mindful that we need to prevent these kinds of abuses in the future.

The federal regulators—the cops on the beat—must be far more aggressive in policing the markets. The Federal Reserve [Board] noted as early as 2003 that problems were developing. Yet, not until it came under intense pressure from the Congress did the Federal Reserve agree to meet its obligation under the Homeownership and Equity Protection Act to prohibit unfair or deceptive mortgage practices. The board has the power to put an end to many of the practices that have gotten us into this mess today. They ought to exercise that power, and they ought to do it comprehensively and quickly.

In addition, a number of us have introduced or outlined antipredatory-lending legislation. Let me say, the measure of any legislation must be that it creates high lending standards for the subprime market, and it must include remedies and penalties sufficient to ensure those standards are adequately enforced. Today’s crisis is a market failure. Legislation must reengineer that market so that it works to create long-term, sustainable and affordable homeownership.

 

NO

Rep. Tom Price, R-Ga.

Member, House Committee on Financial Services

From a statement to the committee, Sept. 5, 2007

 

As anyone paying attention can tell you, we’re seeing a dramatic increase in the actual number of foreclosures. To put the current “crisis” in perspective, according to the Mortgage Bankers Association in the first quarter of 2007 there are about 44 million mortgages in the U.S. and less than 14 percent of them are subprime. And only about 13 percent of those subprime mortgages are late on payments, with the majority of late payers working through their problems with the banks.

With approximately 561,857 mortgages in foreclosure—up from roughly 517,434 from the fourth quarter of 2006—the subprime “meltdown” has given us an increase of 44,423 loreclosures. This still represents a small percentage of the number of home mortgages.

One of the main reasons we have seen a rise in foreclosures is that during the housing boom of the last few years, consumers with a higher credit risk qualified for mortgages. Now that those riskier loans are resetting to higher interest rates—a trend that will continue until April of 2008—a credit crunch is occurring for home buyers. It will take time to determine which of the mortgage-backed securities contain “bad” loans and which don’t, partially because the entire securitization process is relatively new and hasn’t faced a challenge of this size.

A comprehensive consumer-advocacy-driven predatory-lending bill is not the answer. It is tantamount to fighting the last war and will only make the markets more skittish, as they have to react to new underwriting standards and liability issues, making the situation worse, not better. This would harm all consumers!

By the time a new “anti-predatory-lending” law goes into effect in the marketplace, this problem will already have changed, and we will be left with strict, national underwriting standards that will prohibit various loan products and banish a number of consumers to the rental market forever. This is not a goal that is responsible.

The American economy has more than enough liquidity and is plenty strong enough to weather this bump in the road. Congress should stay out of the way while the market corrects itself or it will only make matters worse. We saw last week just how strong the market is when the Commerce Department reported that the gross domestic product—the broadest measure of economic health—expanded at an annual rate of 4 percent in the April-June quarter, significantly higher than the 3.4-percent rate the government had initially estimated.

 

 

 

 

Name: ___________________

 

The activity is about national debt and healthcare policy. It is required to complete activities in this module.

 

Activity #3A: US National Debt

From time to time, concern over the national debt prompts politicians to place spending-reduction policies on the national agenda. However, United States has had a long history of debts and deficits, and history has shown that debt levels have fluctuated over.

 

A variety of sources are available to track this debt. Go to U.S. Debt Clock (Link opens in a new window) to find useful information on federal (national) debt and analyze problems. And then answer to several questions below.

 

Q 1-1: What is the current federal (national) debt?        $_______

Q 1-2: What is the debt per person?                                 $_______

Q 1-3: What is the debt per taxpayer?                              $_______

Q 1-4: What is the federal budget deficit?                       $_______

Q 1-5: What are three largest budget items?

1. Largest budget item _______
2. 2nd largest budget item _______
3. 3rd largest budget item _______

 

Q 1-6: What are the concerns about long-term debt? What are the options to deficit spending? Would you be willing to pay higher taxes and receive fewer services in order to reduce the federal budget deficit? Do you think candidates (for presidency, senate, and congress) in the United States would be successful if they ran for office promising to cut spending and increase taxes? Why or why not? (You are required to write 150 words).

 

Activity #3B

Economic policy is one of the most important public policy areas. What are the various goals of government involvement in the economy? Should the government be concerned most with protecting the welfare of its citizens, or ensuring competition in the free market? Should the government strive to maximize economic growth? To protect consumers? To protect the environment? In cases in which these goals conflict, how ought we prioritize them?

Make sure to post one original post requiring 300 words in length