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What Bush Won't Say to Help the Market

The State of the Union address that you will not see contains leadership to right the housing ship.

True leadership is needed from the top if we are going to battle the two-headed dragon of housing and credit problems.

Many observers, including our own Doug Kass, believe that the only possible solution is a "Marshall Plan," a reference to the post-World War II reconstruction of Europe.

I agree with Kass on the need. In a

prior article, I explained why the political environment was not conducive for major changes.

The president is the only source for such policies and the forum is often the State of the Union Address later this month. In the spirit of Kass'

possible events for 2008, I present a State of the Union scenario for a comprehensive plan.

Those following the prospects for financial stocks can use the plan as a scorecard. Three stocks that I'm long, and therefore serve as my scorecard, are

Goldman Sachs

(GS) - Get Goldman Sachs Group, Inc. (GS) Report


Merrill Lynch



Fannie Mae



I am not optimistic, but the fantasy scenario is interesting. The president's speechwriters are already at work on the plans for the State of the Union address, and the president himself is already

showing some movement in this direction.

Below, I imagine what it might be if the president were to take the necessary leadership mantle. This deals only with the housing and credit issues, which would be the conclusion, and most important part of the speech.

President Bush

: I turn now from the threat to our country by our external enemies to a challenge that is just as serious. The power of our great nation depends upon our strength within -- the resolve of our people, reflected in character and commitment, but also the enduring strength of our economy. The triumph of freedom and democracy rests upon the success of our system, emanating and growing from what we do at home.

We face a grave problem, which may already be a crisis. There is a threat to our economy, a threat that is greater than we have seen in many years. Housing prices are falling, partly because qualified buyers cannot get loans. People cannot refinance loans because housing prices are falling. It is a vicious circle. It has made it hard for average people to get new loans to buy homes.

Mistakes were made. But that is in the past. We must look ahead. Someone must act. I am going to quote a great president from the other party: "The buck stops here!"

What should we do? I have a plan with three parts, steps in addition to those my administration has already taken -- helping some homeowners relax loan conditions without undue tax burdens.

First, we need to empower our existing lending institutions -- the FHA, Fannie Mae and

Freddie Mac


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. I call upon our mortgage oversight agency, OFHEO, to relax the extra capital requirements on Fannie and Freddie, allowing them to expand lending by 30%. They may also need to add additional capital, but this will be a good start.

Next, we need to recognize that so-called "jumbo" loans, those over $417,000, are fairly common in some parts of the country. The inability of qualified borrowers -- people who have demonstrated ability to meet payments -- to get loans in this market has crippled lending for millions of Americans. Both


chair Ben Bernanke and Treasury Secretary Paulson have pointed out the need to increase the size of the "jumbo" designation, permitting Fannie and Freddie to help in this market.

I call upon Congress to support my proposal for a temporary relaxation of this requirement. We can revisit the subject when this crisis has passed.

Finally, we need to make sure that our lending institutions have a free market. The market in old mortgages is not free. A climate of fear and uncertainty has crippled our banks. My economic advisers say that it is not a problem of value, but one of liquidity. We need to unfreeze these markets and restore the normal functioning of our economy.

To this end, I have created a bold and decisive plan. My plan, which will be introduced in both houses of Congress next week, provides for a temporary federal program modeled after the Resolution Trust -- something that solved our savings & loan problems in the '90s. The National Security Homeowner Trust will establish the federal government as the buyer of last resort for existing mortgage securities.

Some short-sighted critics will call this a bailout. Some economists dwelling on theory will say that it creates a problem. They have a fancy term -- moral hazard -- for this. They scoff at the steps that are needed -- and needed right now -- to keep our country strong, preserve housing values and avoid a recession. This attitude is wrong, and threatens our economic strength and security.

Those who have made mistakes have already been punished -- some of them severely. Top executives have been fired. Stocks of leading companies have declined. Investors have lost heavily, and some Americans have lost their homes. Enough is enough. The lesson has been learned.

The effects have now moved far beyond those who made the mistakes. With us tonight in the gallery are several people who can testify to this.

Hank (gestures to the gallery) is a small businessman, a contractor. He has built his business over 30 years and employs 25 people. He works for construction firms building homes. Some of them now owe Hank a lot of money -- over $30,000 -- and they are unable to pay him. Hank did nothing wrong. He just worked for the same people he has for many years. Now his employees face layoffs and his business is threatened. He is an innocent victim, and so are his workers.

Juanita is a middle school student. Her school depends upon property taxes from a community that was, until recent months, rapidly growing. Now the school is cutting back on everything -- the athletic program, field trips, textbooks and teachers. Her family is current on their mortgage payments and taxes, but that is not true for their neighbors. Her parents both work (her dad works two jobs), but they are victims of their neighborhood, where houses are now vacant and taxes not paid.

Jack is an urban professional. He recently got a nice new job requiring a transfer to another California city. He has two problems. He cannot sell his home, even though he has a qualified buyer. The buyer cannot get a "jumbo loan," which is really just an average house in his city. Jack is having a similar problem getting a loan at his new location. The Rutledge family did nothing wrong, but they are victims.

Harvey is a deputy sheriff in a prosperous Illinois county. The county property tax revenues are declining and the budget faces cutbacks. Even though security needs are high, the public safety budget is being cut. Mr. Collins is a victim of the credit crisis, and so are the citizens of his county. They now face a higher risk of crime.

These people and their families are only a few examples of those affected. Those watching this at home are also victims, since their own home values are threatened.

The point should be clear to any thinking American. We need to act, and act together. Not as people of different parties. Not as candidates for public office. We need to act as Americans, pulling together for everyone's benefit.

Also joining us tonight is America's leading investor, Warren Buffett. He is known to everyone as a symbol of clear thinking and wisdom. In the past, he has stepped up to help distressed financial firms. He has advised leaders of both parties. He knows value and knows how to build a good team. Mr. Buffett has agreed to advise the Homeowner Trust, not doing the day-to-day work, but making sure it is done right.

The trust will be a buyer of some of the fancy mortgage securities that are hard to price. My Council of Economic Advisors and Treasury Secretary Paulson tell me that the homeowner trust may not actually need to buy many of these securities. The very fact that they provide a market will help regular lenders to act.

Many of these securities, I am told, are not properly valued. Most of the loans are still good. The threat is that they will fail if the credit market does not work as it should. If we fix the credit market, the government may actually show a profit by buying and holding these mortgages. We need to work with the borrowers since no one benefits from foreclosures.

Some cynics will surely ask why Mr. Buffett does not do this himself if it is such a good idea. The answer is simple. Much of the benefit from the program comes from stabilizing the economy, getting more tax revenue, and balancing the budget. It is just like supply-side economics. A little help in the right place is good for us all. This benefit would not go to a private company, so these companies lack the incentive to do what is needed.

This is my last State of the Union message, so I do not have a personal stake in this program. I am acting because leadership is required, and I am your leader. It is a time for members of Congress and candidates for office to rise above partisanship and act for the benefit of all. Voters in the upcoming elections should keep score and take names. I will help!

Finally, there are some who place all responsibility for this problem on the Federal Reserve Board. An independent central bank is an important part of our government and economic management. I, and everyone in my administration, avoid telling Chairman Bernanke what he should do. The Fed has been cutting interest rates to help with these problems. We are confident that the Fed will act appropriately to support these policy moves, many of which they already endorse."

So that is the speech we should see. You will not see this message in the State of the Union Address, but maybe you should. It is unfortunate that the credit crisis has come in the last year of the administration of a president with low approval ratings. It has also not been approved or considered by Mr. Buffett, but who knows? He might answer the call of his country.

Finally, each proposal described has already been introduced and discussed by some leading experts. What we add here, along with a little style and the addition of Mr. Buffett, are two key elements: Making a comprehensive plan and providing leadership.

At the time of publication, Miller was long GS, MER and FNM, although positions may change at any time. Jeffrey Miller is president and CEO of NewArc Investments, a registered investment advisor, and Capital Markets Research. To see more of Jeff Miller's writing, visit

Dash of Insight. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Miller appreciates your feedback;

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