August 21, 2012 · 0 Comments
By David Dayen:
Any time you hear defenders of the Obama Administration talk about how they did all they could for the economy, reached the limits of what was possible, they typically conveniently ignore housing, and the hundreds of billions of dollars they left on the table there. Today the New York Times at least bothers to pick up that thread, noting that the Administration’s response to the foreclosure crisis, which I would label something between “non-existent” and “counter-productive,” has weighed down the recovery.
After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy.
But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.
During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.
The nation’s painfully slow pace of growth is now the primary threat to Mr. Obama’s bid for a second term, and some economists and political allies say the cautious response to the housing crisis was the administration’s most significant mistake. The bailouts of banks and automakers are now widely regarded as crucial steps in arresting the recession, while the depressed housing market remains a millstone.
I know some are fuming that the rest of the article reads as an apologia for this failure. But though there are a few things wrong with it (“unpopular” programs is way too strong, and what’s really unpopular is a continued foreclosure and housing crisis), the top of the upside-down pyramid lays things out pretty succinctly. The Administration had no interest in saving homeowners in the same way that they saved banks or the auto industry. They relied on meaningless programs that predictably failed to reach their goals, and rejected all kinds of alternative possibilities. And now it’s coming back to bite the Administration in time for re-election.
What this misses is the documented evidence that this was a conscious strategy on the part of the Administration, and part of their efforts to protect bank balance sheets. The Treasury Secretary admitted this in 2009, when he stated that HAMP, the signature foreclosure mitigation program, was designed to “foam the runway” for the banks. The goal wasn’t to save people from foreclosures, it was to allow the banks to absorb housing inventory more slowly, so they could maintain the accounting fictions on their balance sheets. It was simply to spread the foreclosures out over a longer time horizon.
The one area where the story does a decent job is in recounting the Administration’s silence after the inauguration on cramdown, a policy that then-candidate Obama discussed openly and often on the campaign trail. It was promised on several occasions by Larry Summers and others during the transition, and then it was simply dropped. The article makes clear that the Obama Administration, not Congress, deserves the blame for this, because they just dropped the matter almost immediately upon entering office. (UPDATE: And this has been reported before. The Administration clearly undermined the effort to pass cramdown, with Geithner and Summers taking the lead, just as they took the lead against principal reduction.)
The rest of the NYT story just repackages the Administration’s ready list of excuses for prolonging the crisis. They were afraid of big bad Rick Santelli and his proto-Tea Party rant. They thought that the economy would rebound and that there would be no need for a major excavation of mortgage debt. They did all they could do, at the “frontier of the possible” (Tim Geithner’s words). They didn’t know how bad the servicing industry was.
All of these fall short, and by the end of the article – and this has been confirmed to me – the President is telling his economic team that they screwed up housing. But the excuses really are an insult, and they are ripped from the context, the real context, that the Administration trod slowly on housing to avoid putting the banks in any jeopardy. The fact that they had all this leverage from the fraudulent use of false and forged documents in state courts, and managed to sew it up in a slap-on-the-wrist settlement, tells you all you need to know. The White House didn’t want to go there because they were afraid they would find something that would force them to act against the banks. So they didn’t, and here we are.