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November 26, 2012

On Economy, Justice, Obama Housing Plan Fell Well Short

Posted in: Uncategorized

Over the holiday, Zachary Goldfarb released a fairly remarkable article recounting a meeting between the President and top economists:

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 on what do to fix the ailing economy. “I’m not asking you to consider the political feasibility of things,” he told them in the previously unreported meeting.

There was 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.

Obama was reserved in response, but 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?”

This was in October 2011, when talks on the foreclosure fraud settlement were in full swing. Timothy Geithner pled ignorance as to what the Administration could do, but they were in the midst of a negotiation where they had immense power to dictate terms to the leading banks in such a way that could, if they chose, mandate debt reduction. In fact, the weak settlement that ended up getting signed has so far seen more than half of its debt relief go to a process whereby borrowers are forced to sell their homes at a loss. This also came at a time, still true to this day, where Geithner’s Treasury Department hadn’t sanctioned a single mortgage servicer for failing to meet program guidelines under HAMP. And it came at a time where barely $3 billion of the initial $50 billion commitment from TARP, already authorized by Congress, had been spent.

So Geithner’s protestations about employing the “best feasible solutions” are really disingenuous. Unless by “feasible” he means the “solutions which hold banks the most harmless.” The truth is that Geithner wanted to protect banks and their bondholders at all costs, and that didn’t match with delivering debt relief to borrowers. Period.

This is especially true when you consider that the actions taken to stop the fraud in the mortgage lending markets failed to even act as a deterrent, to say nothing of helping to assist in the economic recovery. So the actions taken didn’t even do the bare minimum of protecting homeowners, to say nothing of giving them relief.

“Lawsuits have a deterrent effect only if the government is willing to take action against the individuals responsible,” said James Cox, a securities law professor at Duke University who has followed the financial crisis closely. “I’m very skeptical about whether you change the business culture if you impose a fine on a company.”

Sally Simpson, a professor of criminal justice at the University of Maryland, has studied the deterrent effect of government lawsuits. Her findings suggest that attempting to hold an individual accountable sends a “more powerful deterrent message” than simply suing an institution.

It appears that the sum total of the mountain of fraud we saw during the housing bubble will amount to one unfortunate woman who ran a document fabrication company going to jail.

So you can look at this failure on two levels. One, the failure to address the balance sheet recession prolonged the recession and deepened the hole from which recovery had to spring. Two, the failure to address rampant criminality keeps the same framework for fraud in place and eliminates the deterrent that would stop it from happening again. So, this is a case where what’s right for the economy would have matched what’s right for the rule of law.

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