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Clinton Fears Japan-Style Malaise
Economic Proposal
Pushes Plan to Buy
Troubled Mortgages
By BOB DAVIS and AMY CHOZICK
March 27, 2008; Page A3

Hillary Clinton said she fears the U.S. is slipping into a Japanese-style economic malaise that will overwhelm the Federal Reserve's considerable powers.

The Democratic presidential candidate said the U.S. government should be ready to buy troubled mortgages from investors and lenders to spur a recovery and avoid a lengthy period of stagnation because of unaddressed weaknesses in the financial sector.

AUDIO EXCERPTS

Senior economics editor Bob Davis and political reporter Amy Chozick talk to Sen. Hillary Clinton about her views on the role government should play in the economy. Read the full transcript."We might be drifting into a Japanese-like situation," she said Wednesday in a wide-ranging interview with The Wall Street Journal on economic issues. "I don't think we can work our way out of the problems we're in in the broad-based economy with monetary policy alone. I think the Japanese tried that and tried and tried that."

Sen. Clinton laid out new details of her plan to have the Federal Housing Administration purchase underwater mortgages -- those in which homeowners owe more than houses are worth -- from investors and lenders. Such a program could work in combination with a federally backed system to auction mortgages in default.

On Monday, she said simply that the FHA should "stand ready" to buy troubled mortgages. But she made clear in the interview that such purchases may be necessary to make sure auctions don't fail, which would further undermine confidence in the financial system. "Suppose we go to an auction without that backstop" of federal purchases, she said. "I'm not sure sitting here today exactly what the outcome of that auction would be."

Rep. Barney Frank (D., Mass.) and Sen. Christopher Dodd (D., Conn.) are pushing proposals to establish such an auction system. The Bush administration is considering a separate plan that would offer partial government insurance on mortgages held by homeowners who owe more on their loans than their homes are worth.


Sen. Clinton didn't estimate the size of a government loan purchase program. Mark Zandi, chief economist of Moody's Economy.com, estimates there are 8.9 million homeowners under water with $1.9 trillion in mortgage debt.

Sen. Clinton said that, if the government's buying and eventual sale of the mortgages is handled well, "over the long term, the government involvement would be self-financing."

Treasury Secretary Henry Paulson Wednesday criticized the Clinton proposal, which harkens back to the New Deal's Home Owners Loan Corp. That agency helped families avoid foreclosure by replacing mortgages in default. It bought mortgages from banks with government bonds and then issued new, lower-cost loans to homeowners. "We do not need a system-wide solution for the vast majority of loans where a homeowner temporarily has negative equity," said Mr. Paulson. "Negative equity does not affect borrowers' ability to pay their loans," and in the long run many homeowners will find their purchases "good investments" despite their current woes, he said.

Sen. Clinton has become the underdog in a fiercely contested race with Sen. Barack Obama and is using economic policies to burnish her claim that she is better prepared than he is to be president. The nation's housing woes are a particularly powerful issue in Pennsylvania, where she needs a big win in an April 22 primary to keep her campaign alive and convince superdelegates that she has a better grasp of lunch-pail issues.

Sen. Clinton made her comments before heading off on a six-day "Solutions for the American Economy" tour of North Carolina, Indiana and Pennsylvania. Many of her economic proposals are similar to Sen. Obama's. But she has gone further than Mr. Obama in calling for a government response to housing problems. (See related article.)

In a speech on economic policy scheduled for Thursday in New York, Sen. Obama is expected to emphasize tax cuts for middle-class families -- a proposal Sen. Clinton doesn't endorse -- and additional ways to stem foreclosures. His economic advisers caution that the next turn in the financial crisis will be credit-card debt. Credit-card delinquencies are rising as hard-pressed consumers turn to plastic to pay for the rising costs of gasoline, groceries and other necessities, in addition to discretionary purchases, such as furniture.


"You have the same deterioration of credit standards, the same securitization of debt, the same leveraging, the same inability of people to pay," said Austan Goolsbee, the Illinois Democrat's chief economic adviser. "People are using credit cards as their cushion. We're set up for a consumer credit-card debt crisis if we do nothing."

In contrast to the Democrats, Sen. John McCain, who is in line to become the Republican nominee, is positioning himself as a small-government, low-tax advocate -- despite a decades-long record in the Senate of battling pharmaceutical, broadcasting, airline and tobacco industries and opposing the Bush tax cuts of 2001 and 2003.

Now Sen. McCain says he wants to extend those tax cuts and is taking a hands-off approach to turmoil in the housing and financial markets. Tuesday, he laid out a set of principles to guide any legislation. "There are a whole set of interventions that have the potential to do more harm than good," says Douglas Holtz-Eakin, economic adviser to the Arizona senator. He cited Sen. Clinton's proposal to have the government buy troubled mortgages.

In the interview, Sen. Clinton, a New York Democrat, said even the specter of taking office during a recession hadn't changed her determination to boost taxes on the wealthiest taxpayers by reversing the Bush tax cuts. Those tax cuts are set to expire at the end of 2010. She dismissed the argument that taxpayers look ahead at what their tax bill may be in the future. "I don't buy it," she said. "The tax rates of the '90s did not slow down investment and wealth creation."

On trade, she deepened her criticism of trade agreements such as the North American Free Trade Agreement with Mexico and Canada, which her husband pushed through Congress in 1993. She has said she might pull out of the agreement if she were president.

While Nafta is benefiting parts of the country, she said, "we haven't come to grips with some of the comparative disadvantages we have suffered because of our trading agreements."

"There have been some very positive results of trade," she continued. "But I don't think you can generalize and argue that trade has really broadly affected the people of a lot of the countries with whom we trade. There is still too much of the benefits of trade and the global capital markets favoring elites and multinational companies in a way that isn't spreading prosperity."