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COMMENTARY: SEVEN LITTLE WORDS By Mark Lieberman, Chief Economist for the Five Star Institute When the Federal Open Market Committee percent; in the 11 quarters in which government (FOMC) completed its two-day meeting spending fell, growth was under 2 percent.) at the beginning of May, it issued the usual At the heart of the spending/growth six-paragraph post-meeting statement, disparity is a philosophical debate over the role included seven words—changed from the of government: those who believe government statement issued March 20—summarizing should be run like a business and avoid debt and the Federal Reserve's frustration as it has taken those who see the role of government as spending unprecedented efforts to shore up the economy counter-cyclically and increasing outlays when the by dropping interest rates to historic lows and economy. pumping in billions of dollars. The debate recalls an old tale of a The seven words suggest the FOMC has businessman who each week passes a beggar been going it alone, without the cooperation and drops two dollars into the beggar's cup. One of the president or Congress. After suggesting week, the businessman drops in only one dollar in its statement there have been improvements and the beggar asks why. "I had a bad week," in consumer spending and the housing sector, the businessman explains, to which the beggar the FOMC added: "fiscal policy has been replies: "Because you had a bad week, why restraining economic growth." should I suffer?" "Fiscal policy," simply put, is the means by Indeed, when government has "a bad week" which a government and reduces its spending, adjusts its levels of the entire economy spending in order to suffers, especially an Since the recession monitor and influence a economy such as that of officially ended in nation's economy. It is the the United States, which sister strategy to monetary mid-2009, the nation's relies on consumer policy that is used to economy as measured spending. As a result influence the nation's of the sequester cuts, money supply. Taken which no one thought by gross domestic together, the two policies allowed are used to direct a product, has grown by would ever be cuts in to take effect, country's economic goals. an average of about 2.14 unemployment insurance Monetary policy is set by the Fed while fiscal percent, hardly robust, benefits are starting to be implemented on a statepolicy is the result of but that doesn't tell the by-state basis. actions—or inactions— In Maine, the by the executive and entire story. number of weeks an legislative branches. The unemployed worker can numbers support the receive benefits will be argument the fiscal policy has been holding back reduced to 54 from 63 beginning next week; in economic growth. Ohio, benefits will be cut 16 percent or about Since the recession officially ended in mid2009, the nation's economy as measured by gross $50 per week; in Washington, the cut will be 21 percent or about $31 a week. domestic product, has grown by an average The problem with running the government, of about 2.14 percent, hardly robust, but that any government, like a business is that a business doesn't tell the entire story. Growth rates for is set up to make a profit while a government is quarters in which federal spending increased are not, and governments provide services which significantly higher than for quarters in which the private-sector businesses would not. There federal spending fell. is a certain irony in that the anti-government Federal spending increased in seven of the 15 advocates want government to get out of the quarters since the point at which the National Bureau of Economic Research said the recession way so, they say, the private sector can flourish. Guess what, some government advocates want ended. In those seven quarters, growth averaged government out of the way, too, because that 2.6 percent—below the "trend" of 3 percent, would mean the economy is thriving, that we've but almost double the 1.76 percent growth rate eliminated poverty, and all the other reasons in the eight quarters in which federal spending government must exist. Would that it were so. declined. (Lest we think only the federal Hear Mark Lieberman on P.O.T.U.S. Radio government is to blame, total government spending rose in only four of the 15 quarters (SiriusXM 124) every Friday at 6:20 a.m. (EDT) and when it did, GDP growth averaged 2.675 and again at 9:20 a.m. (EDT). 16 TREASURY FINDS PAYMENT REDUCTION IS KEY TO MOD'S SUSTAINABILITY The government's Home Affordable Modification Program (HAMP) has provided loan modifications for more than 1.1 million borrowers, according to a housing report released by Treasury last month. These borrowers who received a modification through HAMP are less likely to fall behind on their payments compared to borrowers who received private sector modifications, the federal agencies also noted. While the likelihood of redefaulting on a HAMP modification is smaller, borrowers are disqualified from the program if they miss three consecutive payments. According to the Making Home Affordable program released by Treasury in May, the key to strengthening the chances a borrower won't become delinquent again is to provide a significant payment reduction. "Payment reduction is strongly correlated with permanent modification sustainability," the report concluded after analyzing data from the Office of the Comptroller of the Currency (OCC). For HAMP loans that had been converted for 24 months, just 16.7 percent with a monthly payment reduction greater than 50 percent were disqualified due to missing three payments, according to Treasury's May report. On the other hand, among borrowers whose payments were reduced by 20 percent or less, 42.8 percent were disqualified, the report revealed. Treasury also noted that over time, a smaller share of HAMP modifications has been disqualified. For example, for modifications where 24 months have passed, 33.3 percent that started the process in Q 3 2009 became ineligible for the program because the borrower fell behind on payments, while 24.7 percent of loans modified in Q1 2011 had the same result. In most cases, the fate of borrowers who were disqualified was not foreclosure, with the majority receiving another foreclosure alternative. Data through February 2013 from the largest servicers show 7.2 percent of disqualified borrowers became current. The largest share—28.7 percent—received an alternative modification, while 12.4 percent pursued a short sale or deed-in-lieu of foreclosure. Another 5.2 percent went on a payment plan. According to Treasury's report, 10.8 percent of borrowers disqualified from HAMP ended up in foreclosure.

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