Observers of the Bush Administration have been waiting for years--in vain, it turns out--for the president to abandon some of his policies. This morning, he offered a notable 180-degree shift. In his seven years in office, Bush has focused primarily on economic and tax policies that benefit the wealthy, blithely assuming that benefits would trickle-down to those on the lower rungs of the economic ladder. But in his remarks on the burgeoning subprime mess, Bush discovered what might be dubbed Trickle-Up Economics. He’s rolling out some modest policies to help the have-nots in the hopes that the benefits of the policies will benefit the haves. He’s apparently decided the best thing he can do for the hedge fund managers and investors who constitute a core constituency is to help working-class folks.

The rising tide of defaults on subprime mortgages--and the ensuing foreclosures on hundreds of thousands of houses--have been bad news for the affected families. But they’ve also been bad news for financial institutions, and for the capital markets at large. This summer, the stock and bond markets have suffered a series of spasms, virtually all of which were derived--directly, or indirectly--from the travails of subprime borrowers. Defaults led the bonds backed by those mortgages to become worthless, which in turn caused many of the hedge funds and banks that owned and traded those bonds to fare poorly. That caused banks and investors to grow weary of extending credit generally. And aside from causing political unrest, the increasing number of foreclosures has served to dump even more inventory onto a national housing market that already suffers from too much inventory. Oh, and it’s likely to get worse before it gets better, because billions of dollars in adjustable rate mortgages are poised to reset at sharply higher rates this fall.

President Bush’s proposals this morning were pretty thin gruel. He wants the Federal Housing Administration to expand access to its mortgage insurance program. According to the New York Times, "that would let an additional 80,000 homeowners with spotty credit records sign up, beyond the 160,000 likely to use it this year and next." That’s nice, but it’s like showing up at a sinking cruise ship with a single ten-person lifeboat. He wants to "temporarily reform" a provision of the federal tax code that treats forgiven housing debt as taxable income. (Finally, a tax cut for the poor!) And he has directed relevant federal agencies to work with non-profits and private sectors to help people avoid foreclosure. Also good.

His efforts at moral suasion were the most interesting portion of his remarks. Bush subtly used the bully pulpit to suggest that banks shouldn’t be so quick to foreclose upon struggling borrowers, that they should treat borrowers with too much debt more like banks treat companies with too much debt. When times get tough, they should renegotiate, revise the terms of the loan, perhaps get a haircut. In the corporate sector, foreclosing on a troubled borrower is frequently a last resort.

That’s also a good idea. But given the complexities of today’s mortgage market, it’s not clear this will have much effect. After all, most banks don’t hold onto the mortgages they make. They sell them to Wall Street firms, or to Fannie Mae, which then chop them up into mortgage-backed securities, which are in turn sold to hedge funds and investors, who in turn trade them. For a typical subprime borrower who wants to renegotiate his or her loan, it’s frequently difficult to identify the owner of the mortgage. Meanwhile, there are plenty of pools of capital out there seeking to buy up control of real estate assets by buying defaulted or troubled mortgages.

As was the case with Katrina, the federal relief will come much to late to help many people who have already suffered. But in this instance, helping borrowers who made poor decisions, or who were duped into assuming destructive mortgages, may be a secondary goal. The primary audience for this speech was Wall Street, where traders and investors have been looking for signs that the administration might help shore up the shaky markets. After all, every time a borrower is bailed out, a lender is bailed out, too.