Housing policy is central to our economy and the Great Recession, and Roosevelt Institute Senior Fellow Joseph Stiglitz made that abundantly clear in his remarks at a recent event, "The Government's Role in Housing." Americans spend so much of their income on housing that "when we're talking about housing, we're talking about standards of living," he said. Meanwhile, "How we solve our housing market problems will have a lot to do with the recovery." But while hardline Republicans think there is no role for government in practically anything, Stiglitz contended, "If the government now just walked out of [housing], the market would collapse and our economic downturn would be worse."
The government got involved in the mortgage market in the first place because it wasn't working. "We didn't have a good mortgage market... we had discrimination," Stiglitz pointed out. Plus it had to address "continuing market failures." As a country, we used to understand that markets aren't perfect and that there is a role for government. "There was in the past a view that yes, we understand that markets sometime behave badly, they make shoddy products, they don't live up to what they're supposed to do," he said. "That's why we have regulation."
No time like the present, and no place like the housing market. "The market failures in this market are pervasive," Stiglitz said. "There will need to be government intervention in one form or another." So what should it look like? He outlined seven key areas that need to be addressed:
1. Reform the bankruptcy code: We've made it more difficult for borrowers to discharge debts, but "we have to solve the problems of the past," he said, including the heaping pile of underwater mortgages.
2. Make financial markets more competitive, including the payments mechanism.
3. Deal with TBTF institutions: It's not just banks that are too large, but even without government involved, Fannie Mae as an institution "was too big to fail," he said.
4. Re-focus the banking system: Get it "back to doing what it should be doing, and that is lending," not speculating or pushing paper around to make a profit.
5. "We need strong consumer protection." End of story.
6. Deal with the structure of the mortgage market: "We have a whole system of conflicts of interest and an intstiontal structure of the market is one that makes it not work in the way that it should," he said.
7. Understand the fundamental flaws of securitization: "The benefits have been overestimated and the cost underestimated."
Just a few small suggestions, right? But without addressing these issues, we'll continue to have a housing market that fails the American people and creates a huge drag on our stagnant recovery.