Liveblogging World War II: November 23, 1942
Liveblogging World War II: November 24, 1942

How to Govern America in 2013 II: Mortgages, Housing, and the Recovery

What Tim Geithner ought to be saying:

"In December 2008, it was clear that the economy needed (1) stabilization of the banking sector, (2) expansionary fiscal policy, (3) the rescue of Detroit, and (4) support for the Federal Reserve's low-interest rate policies. Via the TARP, the stress tests, the Recovery Act, and through the actions of the Federal Reserve, we accomplished those goals.

"As a result, the bad times of 2008-13 have been less bad in the United States than elsewhere in the North Atlantic.

"But what I did not understand, and should have understood, was that there was a very good chance that more would be needed to generate a strong recovery.

"I should have pressed hard for a Director of the FHFA who would understand the importance of refinancing mortgages to keep foreclosures from dragging down housing construction and employment.

"I should have pressed for Federal Reserve governors who would have adopted in late 2009 the open-ended quantitative-easing policies adopted three years later.

"I should have pressed hard to set up the Reconciliation process so that it could have been used for another round of expansionary fiscal policy.

"I should have pressed hard for new federal agencies to boost our insufficient infrastructure spending.

"I should have put long-term budget balance issues on the back burner--because the employment deficit was a much bigger problem than the budget deficit.

"It is still the case that rebalancing housing and aggressive monetary expansion are needed policies. It is still the case that the employment deficit is a much bigger problem than the budget deficit.

"I did not use FHFA to rebalance the housing market, and did not push leaders to the Federal Reserve who would properly push for more aggressive policies. Instead, I talked about 'green shoots' and 'recovery summer'.

"I did not serve the country as well as I could have. I am sorry."

But Geithner is not saying that. He is saying "who could have known?" and "what else could I have done?" And this 'I did everything I could' line is no good at all.

Zachary Goldfarb:

Economists, Geithner at odds over role of mortgage debt in recovery: One year and one month before President Obama won reelection, he invited seven of the world’s top economists to a private meeting in the Oval Office to hear their advice… a former Federal Reserve vice chairman, a Nobel laureate, one of the world’s foremost experts on financial crises and the chief economist of the International Monetary Fund, among others. Nearly all said Obama should introduce a much bigger plan to forgive part of the mortgage debt owed by millions of homeowners who are underwater on their properties…. Treasury Secretary Timothy F. Geithner interjected that he didn’t think anything of such ambition was possible. “How do we get this done through Congress?” he asked. “What could we actually do that we haven’t done?”

The meeting highlighted what today is the biggest disagreement between some of the world’s top economists and the Obama administration. The economists say the president could have significantly accelerated the slow economic recovery if he had better addressed the overhang of mortgage debt…. Obama’s advisers say that they did all they could on the housing front and that other factors better explain why the recovery has been sluggish….

“Housing was the neglected piece. They have the kind of attitude that they don’t believe this is a good value for the money, this is politically unpopular, and there’s not much we can do,” said Alan Blinder, a former Federal Reserve vice chairman consulted frequently by the White House. “There were obvious things to do that academics and others started pointing out back in 2008. That could have shortened the recovery time.”

Geithner said the administration chose the best options available to deal with the housing crisis. “We knew the hit to wealth would be damaging. We knew the level of debt had the potential to restrain the strength of recovery,” he said. “The only issue was, what could you do about it? What were the feasible options available? We chose the best of the feasible options.” Obama’s advisers believe the ultimate pace of recovery is understandable, if disappointing….

Lawrence H. Summers, formerly Obama’s top economic adviser, has said he doesn’t think the administration made a major mistake. But this month, he said at a conference in Washington that “if we made a serious mistake, the best arguments would be around questions about housing.” Former budget director Peter Orszag has said that “a major policy error” was made. And Christina D. Romer, formerly Obama’s top economist, has said that the driving ideas “may have been too limited” and that there needs to be a bigger focus on reducing mortgage debt — a process known as “principal reduction.”…

Some of the most authoritative research on the role of mortgage debt in the recession and recovery — research reviewed by Obama — comes in part from an economist from Pakistan who started out studying why poor countries struggle to grow. Atif Mian, now a Princeton professor, came to focus on how finance can destabilize an economy…. Mian and another young economist, Amir Sufi of the University of Chicago’s business school, saw a similar trend here. “The common link to the emerging market crises,” Mian said, “is that it all starts with leverage.”… Mian and Sufi’s research showed something more specific and powerful at work: People who owed huge debts when their home values declined cut back dramatically on buying cars, appliances, furniture and groceries. The more they owed, the less they spent. People with little debt hardly slowed spending at all…. Other economists — from both political parties — were making the same point around the time Obama came to office. Blinder, a Clinton administration official, and Martin Feldstein, a Reagan administration official, developed plans calling on the government to commit hundreds of billions of dollars to restructure millions of mortgages with lower interest rates and principal balances. Said John Geanakoplos, a Yale economist who proposed a plan to reduce principal: “I think the missed opportunity to forgive principal at the end of 2008 and beginning of the 2009 was the biggest mistake the administration made in trying to deal with the crisis.”…

FRED Graph  St Louis Fed 2

[O]fficials simply did not believe that a big program of debt forgiveness was a smart investment, costing hundreds of billions of dollars…. Today, administration officials say they do not see the mortgage debt overhang primarily at work. Rather, they say, foreign shocks, cuts in local and state spending, and other factors dragged down the economy…. Not everyone is impressed, though. “I don’t see the kind of aggressive approach that could make a big difference,” Romer said in September at Hofstra University…. “The housing sector is far from being out of the woods,” Federal Reserve Chairman Ben S. Bernanke said last week. “We should not be satisfied with the progress we have seen so far.”

The claim that cuts in state and local (and federal!) spending are dragging down the economy are well-founded. The claim that mortgage debt overhang and depressed consumption are not dragging down the economy is not well-founded.

Come back and join the reality-based community, Tim! Yes, you messed up--but each day you keep claiming that you didn't further reduces the chances of policies to return the economy to full employment, and further erodes your own standing.

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