(Assemblyman Lieu has been a leader on the foreclosure issue.  Welcome him to Calitics. – promoted by David Dayen)

        Albert Einstein once said that insanity is doing the same thing over and over again and expecting a different result.  Wall Street and Treasury Secretary Henry Paulson have continued to ignore the home foreclosure problem, despite clear and urgent warnings from consumer groups, legislators, and regulators.  Virtually none of the $8.5 trillion in federal taxpayer bailout commitments is directed towards helping reduce foreclosures.   So it should come as no surprise that new data from the Mortgage Bankers Association shows that foreclosures have increased 76% compared to a year ago to hit yet another record high, with a record 1 in 10 Americans now experiencing mortgage trouble.

The problem is particularly acute in California, which accounts for one-third of the nation’s foreclosures.  California alone has 54 percent of all foreclosure filings on adjustable rate loans.  

         Despite the massive foreclosure meltdown, Wall Street and Treasury Secretary Paulson continue to believe a top-down solution of injecting taxpayer bailout money to private Wall Street companies will somehow help our economy.  How does giving hundreds of billions of dollars to large banks so that they can gobble up other smaller banks help homeowners?  How does injecting AIG with $150 billion of taxpayer funds help keep distressed homeowners in their homes?  The answer is those solutions do nothing to address the core problem of unmitigated foreclosures.    

        It is precisely the record number of home loan defaults that is causing the current credit and liquidity crisis.  AIG and numerous other Wall Street institutions collapsed because of rising home loan defaults, not the other way around.  It is insane to keep pouring federal taxpayer money down the Wall Street sinkhole while doing nothing to help reduce foreclosures.  None of Treasury Paulson’s solutions to benefit Wall Street have helped the problem; his solutions have only made our economy worse off.  We cannot keep doing the same thing expecting a different result.  

         It is time for Treasury Secretary Paulson to listen to Federal Reserve Chair Ben Bernanke and FDIC Chairwoman Sheila Bair, both of whom are calling for loan modifications to keep people in their homes.  Bernanke and Bair have been far more prescient, insightful, and rational than Paulson has been.  Until we change our policies, home foreclosures will continue to rise, Wall Street firms will continue to collapse, and our economy will continue to suffer.        

         Wall Street banks should also be ashamed of themselves for not only opposing past attempts to reform the mortgage market, but also current attempts to help alleviate the foreclosure crisis.  The California Foreclosure Prevention Act sets a 90 day foreclosure moratorium unless the lender has a comprehensive loan modification program designed to keep people in their homes.  Wall Street should not only stop opposing this bill, they should embrace it because this is one of the solutions that might actually keep them from going out of business.

Ted W. Lieu is Chair of the Assembly Rules Committee and author of the California Foreclosure Prevention Act

Let’s face it, now is a good time for populism. While it didn’t get John Edwards the nomination, it was a significant factor in the presidential race this year. (Despite being somewhat of an Edwards supporter initially, hindsight says that was probably for the best.) Of course, populism always has been successful, from the dawn of politics. Dollars to donuts there were populists running to be cave leader when we were crafting our first bronze tools.  And don’t get me wrong, I’m into the populism. I think if the 90s had been a bit more populist, perhaps we wouldn’t be dealing with much of the disastrous effects of a free trade policy run amok. Speaking out for the will of the populace shouldn’t be seen as a bad thing.

So, in that frame, we have AB 53, the experiment in populism referenced in the title.  Assemblyman Portantino (D-La Cañada Flintridge) knows that there is an odor of scandal surrounding the compensation of some of the state’s higher earners, especially some of the university executive, and oh yeah, the state is running on financial fumes.  AB 53 would impose a strict, categorical prohibition on any compensation increase for state employees earning over $150,000.

There’s a provision to allow the Governor to make an exemption for state employees that  are “necessary for protecting the safety and security of the people of California.”  Of course, there are a whole slew of exceptions for employees covered by a collective bargaining agreement, or other MOU. And of course, nobody can touch any of J. Clark Kelso’s minions at the prison receiver’s office, or any employees of the Dept. of corrections for that matter.  

All of this sunsets when the calendar rolls over to 2012, so nothing is permanent here.  I believe Portantino’s logic goes something like, we’re in a big financial mess, we shouldn’t be giving raises to those doing well already. And when we swing into another boom cycle, this provision will sunset.  Well, anyway, here’s what he says:

California stands at the edge of a budgetary cliff and will fall into a recessionary abyss unless we act immediately. At a time when we are asking our seniors, our students, and our poor and infirm to bear the budget burden year after year, the least we can do is ask those state employees who are most well-off to forgo any salary increases for the near future.  Together, the shared sacrifices will help put California back on track.

To be sure, we are living in dangerous budgetary times.  While it’s not clear how much money this legislation will save us, it’s clearly going to be a nonzero number.  This is probably as reasonable of a cost-savings measure as, say, cutting medi-cal payments or cutting teachers. I honestly don’t know whether this legislation will be a net positive for us right now.  I can, however, tell you that if this legislation is still with us during better job times, we are putting ourselves at a significant disadvantage.   That’s why I think the sunset provision is particularly important. Given that the legislation probably wouldn’t go into affect until Jan 1, 2010, we are probably only looking at an initial term of two years for this measure.

And I certainly won’t argue about his take on the budget; he’s, unfortunately, dead on.  But, playing populist with our civil servants seems a risky road to set upon. Sure, those making over $150K are easy targets, but targeting those who have selected to work for the state government is inherently risky.  While the job market is soft right now, we are taking a risk.  The people who make over $150K are, for the most part, worth more in the private sector than they are making with the state.

Executives at Cal, investment managers at CalPERS, and a slew of other highly educated public employees voluntarily work at a discount for the state. The downside risk here is that if we become even more un-competitive on salary, we won’t be attracting top talent. In fact, that’s already a problem even in this recession.  On Thursday, Capitol Alert had a story about the Accounting Board having problems attracting CPAs to inspect other CPAs.  The salary of slightly over $70K just wasn’t sufficient.  While those folks will not be affected by this legislation, it does illustrate that the state does, in fact, operate in a greater job market.

But, on the other side, we can be sure that there will be considerable opposition to this bill. If nothing else, you can say that Asm. Portantino is willing to take on a fight. Who knows if this legislation has a chance to get through, and what it would end up looking like if it does, but this experiment is surely one to watch.