Foreclosing the Foreclosers, Early-American Style

Feb 28, 2011William Hogeland

american_colonial_flagMemo to Tea Party: The major social battle raging during the time of the American Revolution was over the proper uses of money and credit. Not getting government out of the economy.

"I got debts that no honest man can pay ... "

american_colonial_flagMemo to Tea Party: The major social battle raging during the time of the American Revolution was over the proper uses of money and credit. Not getting government out of the economy.

"I got debts that no honest man can pay ... "

~~Bruce Springsteen, "Atlantic City"

O. Max Gardner III, a patrician lawyer in Shelby, North Carolina, has started a movement for resisting home mortgage foreclosures.

In what Reuters describes as "legal jiu jitsu," Gardner teaches techniques for using a bank's lumbering hugeness to enable people to stay in their homes long after banks want them gone. He's not alone. A foreclosure resistance movement has gained national traction in the past year. The Times has reported on local sheriffs' refusals to evict, and in an especially pointed act of guerilla theater, Patrick Rodgers of Philadelphia recently turned the tables on Wells Fargo by starting a foreclosure against the bank's local mortgage office. According to ABC News, the bank had not paid Rodgers a court-ordered judgment it sustained in the process of failing to respond to his demand under the Real Estate Settlement Procedures Act (RESPA) for information about his mortgage. Rodgers thought his foreclosure gesture would at least get the bank's attention.

The foreclosure resistance movement understandably disconcerts those who are concerned above all about fulfilling legal contracts and taking what the Tea Party-connected right calls "personal responsibility" for the inability to make mortgage payments. Yet the resistance has strong precedents in the same founding-era America to which the Tea Party constantly appeals. Conflicts not between American colonists and the British government but between small-scale American debtors and big-time American creditors illuminate struggles that continue today.

It can be hard to envision an early America seething with conflict between ordinary, hardworking Americans, stifled in their efforts to get ahead, and the rich, predatory Americans who stifled them. Prevailing historical fantasies of pre-Revolutionary America conjure a modestly thriving yeomanry, along with craftsmen, small businesspeople, and merchants participating together in a representative civics. In this fantasy, income and wealth disparities look minor and manageable; slavery and women's subjugation are terrible deviations from an ethos of liberty shared more or less democratically by free Americans of all types. The main problem for everyone is the restrictive influence of the British elements in government. The rosy narrative has it that a revolution dedicated to freedom of trade and thought and the proposition that all men are created equal will launch this society on a grand progress, embattled but irresistible, toward a democracy that includes everybody.

Of course many historians have added troubling nuance to that picture; some have debunked it entirely. Certain history students, possibly over-interpreting the work of Howard Zinn, routinely reduce famous American founders to self-interested hypocrites. Yet across the political spectrum, fuzziness about founding-era economics, credit and monetary policy persists. The fuzziness helps today's populist right cast nativism and unfettered markets as essentially American.

The possibly startling fact is that the major social battle raging before, during, and after the American Revolution was over the proper uses of money and credit in American life. For ordinary people of the period, these were hardly abstractions. The only real money in 18th-century America was metal -- silver and gold coin from England, Spain, and Mexico -- and for long, terrible periods, money was rarely seen by ordinary people. Small farmers and artisans, wanting to survive and improve their lot, had to borrow. Merchants, gaining access to metal through imperial trading networks, used their money to make money, becoming lenders. Well before the Revolution, Americans defined themselves in practical terms either as "debtors" -- poor and working people in small-scale enterprise -- or "creditors" -- well-heeled merchants growing their money by lending it.

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Workings of the debtor-creditor relationship will sound unpleasantly familiar. Merchants had the money supply conveniently sewn up. Small farmers and artisans had to post the land and shops they hoped to develop as collateral for the credit they needed. Merchants might set interest rates as high as twelve percent -- per month. Default, often predictable at the loan's outset, subjected borrowers to foreclosures, which in bad times were epidemic. Families became indigent while their land, tools, and homes were snapped up at bargain prices, often by the merchants themselves, who speculated in land as well, and were building immense parcels. The rich got richer.

Is it any wonder that ordinary people viewed this disastrous economic predicament not as some incidental fallout from vigorous free-market competition, but as an egregious, systemic injustice with political, moral, even spiritual implications? They were being held back, exploited, and even ruined by a monopoly on money and credit. And unlike today's populist right, founding-era Americans did not imagine that government's simply leaving markets alone would create new and exciting opportunities for them. They believed their governments should make laws to restrain the overwhelming power of the creditors' metal and protect those who labored and produced goods from those who planned dynasties of descendants living in luxurious idleness.

And remember: unless people had property in excess of certain amounts, they couldn't vote. Whig elites -- the ones who became patriot leaders, lionized today -- axiomatically equated the right of representation with property. It took even more property to run for office. Legislatures erected counties to ensure that representation favored the rich and the cities. They placed cash fees on every imaginable transaction, paralyzing working people's efforts to pursue legal recourse and enriching lawmakers' friends and families appointed as collectors and administrators. Roads and other infrastructure built at public expense (and by coerced labor taxes) served the merchant interest, not the people's. Hardly an embryonic American democracy, representative colonial governments were monopolized by forces that small-scale debtors and tenant farmers could only view as a creditor conspiracy to exploit their labor, prevent their participation, and take what stuff they had.

­So they organized in vociferous protest. "Mob" is a loaded term; "crowd" is perhaps more fair, and early American crowd action should be understood as a tactic, in the absence of access to the franchise, for pressuring and even changing government. One of the most famous outbreaks occurred in the 1760's in North Carolina, when ordinary people briefly had a few champions in the legislature. They forcibly closed courts, tore down corrupt officials' homes, and finally went to war against the provincial government. Royal Governor William Tryon put that rebellion down -- but the King's appointee was more sympathetic to the people's plight than upscale American legislators and merchants were.

Crowds could be flamboyantly scary and even violent, but they did not run amok, merely venting. In carefully organized disruptions, people moved en masse into courthouses where debt cases were heard, shutting down a judicial process they considered unjust. They felled huge trees across roads to prevent sheriffs from repossessing homes. They enforced no-buy covenants when foreclosed property went up for auction. They staged daring rescues of prisoners held on debt charges. Serving on juries in debt cases, they refused to convict. Well before the famous Stamp Act riots and other acts of resistance to new British trade laws, American life involved orchestrated crowd actions to prevent financial injustice and push government to act on behalf of ordinary people. After the Revolution, the event known as Shays' Rebellion became only the most famous of the debtor uprisings that continued the people's struggle in a new political context.

While emulating Shaysite and other debtor crowd actions today would pose an interesting counter-demonstration to Tea Party efforts, the question this history really raises has to do with what Americans want from their government. Do we really want to roll back "nanny state" protections like RESPA, for example, under which an ordinary citizen like Patrick Rodgers was able to interrogate his bank? RESPA is but one detail in a program -- and a power -- that our ancestors painfully lacked.

Tea Party history insists ordinary, hard-working Americans of the founding era wanted nothing more than to reduce government and keep it out of economic markets. But what those Americans really wanted can be gleaned from their terminology. The rich called them rioters. The people called themselves regulators.

**Check out our series on the foreclosure crisis, Foreclosure 411.

William Hogeland is the author of the narrative histories Declaration and The Whiskey Rebellion and a collection of essays, Inventing American History. He has spoken on unexpected connections between history and politics at the National Archives, the Kansas City Public Library, and various corporate and organization events. He blogs at http://www.williamhogeland.com.

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AG Tom Miller Negotiating in Secret with Banks Over Whether to Put Bankers in Jail

Feb 26, 2011Matt Stoller

home-foreclosure-documentIf NFL fans are demanding negotiations be opened up, why are homeowners kept in the dark? **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

Zach Carter wrote a good piece on homeowners' demands of the big banks. National People's Action has coordinated thousands of homeowners in asking for an aggressive settlement with the banks on their handling of foreclosures. Iowa Democratic Attorney General Tom Miller, who is heading the 50-state investigation, is one of their prime targets.

But it's this video that makes it interesting.

home-foreclosure-documentIf NFL fans are demanding negotiations be opened up, why are homeowners kept in the dark? **You can follow Matt Stoller on Twitter at http://www.twitter.com/matthewstoller

Zach Carter wrote a good piece on homeowners' demands of the big banks. National People's Action has coordinated thousands of homeowners in asking for an aggressive settlement with the banks on their handling of foreclosures. Iowa Democratic Attorney General Tom Miller, who is heading the 50-state investigation, is one of their prime targets.

But it's this video that makes it interesting.

Here's the transcript, starting at around :53 into it.

Iowa citizen Mike McCarthy: How close are we to a settlement? And with the settlement, will we have mandatory modifications? Will we have mandatory principal reductions? Will we have restitution for families who were fraudulently kicked out of their home? And also we want to see that these bank officials who were responsible for committing mortgage or foreclosure fraud brought up on criminal charges. I'm gonna ask you again, like I did on December 14. Are we gonna put some people in jail?

Iowa Attorney General Tom Miller: We're really getting close to negotiations. I'm not gonna talk about, I really feel I shouldn't talk about what's gonna be in the agreement, what's not gonna be in the agreement. That's something we have to hammer out with the Justice Department, and the Federal people, and the banks in a negotiating session. So in terms of talking to you or to the press, we're pulling back on specific details.

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Look at what he's saying. Miller has decided that he will keep the public in the dark about the negotiations over how banks will deal with the homeowners they hurt. They can't know when decisions will be made. They can't know if they will have principal reduced. They can't know if they will get loan modifications. They can't know if they will get restitution if they've been illegally kicked out of their homes. Miller will not even speak to criminal prosecutions of bankers over mortgage fraud because he is still negotiating with the criminals over whether to bring charges.

The backstory here is that Miller had exuberantly vowed jail time for bankers to Iowa citizens, before backtracking on his commitment. This level of deception by high officials is now routine when it comes to cracking down on lawbreaking by big banks.

It's not obvious to me why Miller backtracked. I don't think he ever had any intention of charging any bankers with any criminal charges, that's just not how law enforcement works these days. My guess is that he didn't realize that his initial promise to Iowa voters would be taken seriously, and then it blew up in the press. So he decided to stop talking and do the negotiating in secret.

This is not reasonable. If the NFL is being asked to open its books and NFL fans are asking that the negotiations between the players and owners take place in the open, surely the talks over foreclosure fraud can be done with some ability for the public to know what is happening.

Tom Miller may not realize that keeping homeowner victims in the dark while negotiating with the perpetrators is the wrong way to approach criminal activities. But the rest of us do.

Matt Stoller is a Fellow at the Roosevelt Institute and the former Senior Policy Advisor to Congressman Alan Grayson.

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The Housing Bubble, Not Unions, is Major Predictor of State Budget Gaps

Feb 23, 2011Mike Konczal

Despite what governors like Scott Walker say, there's little correlation between union membership and troubled state budgets.

Despite what governors like Scott Walker say, there's little correlation between union membership and troubled state budgets.

Amid all the public debate about how states are being bled dry by militant public unions, you wouldn't know that we just had a major housing bubble across the country followed by a financial system near-collapse and the most prolonged downturn since the Great Depression. Chris Hayes addressed this opportunism of those ignoring of the housing crisis to push long-standing right-wing priorities in the opening segment of The Rachel Maddow show last night, and I think it's worth looking deeper.

John Side posts some graphs of state budget shortfalls against public union density on his site The Monkey Cage:

And:

A commenter summarized the general finding:

I just coded the data "TheRef" posted to distinguish between states with no collective bargaining law and states with some sort of law (0=no law, 1=anything else) and used this to predict the 2011 shortfall as a percentage of budget. I have no idea if this coding is appropriate, but it should provide a rough estimate.

While the relationship was positive (like the r coefficient in the post) it explained less than 2% of the variance (R^2 = .017). This is actually less explained variance than that explained in the above post (.19*.19 = .04), though this could be due entirely to the linear compared to categorical nature of the predictors. Just to note, the unstandardized beta was 3.08.

Interesting, if not that significant. You know what is interesting, significant and recent? A multi-trillion dollar housing bubble.

I'm going to do the same graph with Total Shortfall as Percent of FY11 Budget from the CBPP (table four) as well as negative and near negative equity as percentage of mortgages, Q3 2010 from CoreLogic. Negative equity is correlated with all kinds of other bad things like unemployment, but from my point of view it's a good first approximation for how the housing bubble devastated a community. The more the bubble popped, the more people were hit by falling house prices, the more negative equity grows as a percent of mortgages. (Especially since Case-Shiller took their data to subscription only, and even then, I'm not sure there's a particularly better state-level approximation -- thoughts?)

Graph:

Significant (t-stat of 3.53), and it's significant with or without that outlier in the upper-right corner (Nevada). The mechanisms for how this contributes is important -- is it unemployment? Is it that state governments with a larger housing bubble got more confident and spent as if all those property taxes were on their way? Are there other important, causal mechanisms? These are all good and crucial questions for us to answer, ones we should take up when we finish scapegoating teachers.

Mike Konczal is a Fellow at the Roosevelt Institute.

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Part 2: Regulation, Insurance, Resolution: An FDIC Model for GSEs

Feb 18, 2011David Min

mortgage-crisis-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free?

mortgage-crisis-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free? In the second part, David Min, Associate Director for Financial Markets Policy at the think tank Center for American Progress, argues for keeping the government involved in the housing market by creating an FDIC-inspired backstop. **Read part one here.

1. What went wrong with the GSEs?

Starting in the early 2000s, "private-label securitization," which was essentially unregulated, began to grow astronomically. This growth came primarily at the expense of the GSEs, whose market share dropped by a roughly equivalent amount. In an effort to regain their market share, the GSEs took on more risk, both in terms of the loans they guaranteed and also as far as the securities they acquired for their own account.

As we now know, the extraordinary growth in PLS was based on a fundamental mispricing of risk and structural problems in the process, including shoddy underwriting, misaligned servicing incentives, and bad credit ratings. This led to two distinct sets of problems for the GSEs. First, it created a housing bubble, which disproportionately impacted them, as they are entirely focused on housing finance. Second, the riskier products they acquired or guaranteed in their "race to the bottom" defaulted at rates much higher than expected.

2. What is wrong with simply privatizing the mortgage market?

First, we would be providing an enormous taxpayer-funded windfall to the big financial institutions that caused the financial crisis. Second, we would be effectively punishing many Americans by eliminating the New Deal legacy of broad availability of consumer-friendly mortgages to working- and middle-class households.

As we learned from the Great Depression, banking poses an enormous amount of systemic risk. Exacerbating this risk is the contemporary problem of "too big to fail" banks, which means that effectively, large financial institutions are believed to enjoy an implicit government guarantee on their obligations. It appears that this guarantee is already benefiting them, providing them with significantly lower funding costs than smaller financial institutions.

It is these largest financial institutions that would benefit the most if we adopted either of the Obama administration's privatization proposals. The $5.5 trillion in mortgage financing for the working- and middle-class that is currently provided by the GSEs would need to be replaced by either lenders willing to buy and hold loans on their balance sheet or by private-label securitization. The six largest U.S. financial institutions-Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, Goldman Sachs, and Morgan Stanley-account for over $1.2 trillion in balance sheet-funded mortgage lending, over a third of all such loans. Moreover, these firms, which currently hold about $9.275 trillion in assets, have even greater market power in the investment banking sector, particularly given the consolidation that has occurred in the aftermath of the financial crisis. Thus, they are likely to dominate a private-label mortgage securitization market, when and if this returns to becoming a major financing channel.

If these large financial institutions (and other very large or systemically significant firms) held or guaranteed any significant portion of the $5.5 trillion in mortgage loans currently financed through Fannie and Freddie, it would clearly escalate the problem of "too big to fail", particularly given the importance of residential mortgage debt both for the financial markets and the broader economy.

Privatization would also be bad for consumers. There is limited evidence of what a privatized mortgage market would look like. Since the New Deal, the U.S. government has supported a large segment of the mortgage market either through federal deposit insurance or guarantees on securitization. And there is no developed economy in the world that does not provide significant amounts of government support. (For example, in Canada the government explicitly guarantees up to 70% of outstanding mortgages; in western European countries, governments implicitly guarantee 100% of their mortgage markets.)

The pre-New Deal era illustrates why privatized residential mortgage systems are so rare. Mortgages were only available to higher income and higher wealth borrowers, and even then only on terms that would be considered predatory today: short-term, interest-only, high rates, and high down payments (typically 50%). While this is obviously a very dated example, it is striking that in some important ways, it resembles the current market for commercial real estate finance. As Elizabeth Warren has noted, commercial real estate loans today generally have terms that closely resemble pre-New Deal residential mortgages: short-term, interest-only, high interest rates, and high (often 50%) down payments. And of course these loans are generally reserved for higher wealth borrowers.

All of this points to the same conclusion: privatization would lead to a sharp reduction in mortgage liquidity and a transition away from consumer-friendly products.

3. What does the experience of the jumbo mortgage market tell us about whether a privatized mortgage market can well serve the broader mortgage needs of America?

Nothing. The jumbo market serves higher wealth, higher income Americans, and no one disputes that private capital, absent a guarantee, can provide mortgages to this class of homebuyers as it has always done. It is also clear that since the New Deal, private capital has provided jumbo loans with consumer-friendly terms and prices that are reasonably competitive. But to simply note these facts misses the point.

The questions at issue are these: 1) will private lenders continue to provide affordable and consumer-friendly loans if we get rid of the government-guaranteed portion of the market; and 2) in the absence of a government guarantee, will the private markets make such products broadly available to all Americans (including working- and middle-class households)? As I noted above, the limited historical evidence suggests that the answer to both of these questions is no. This finding is reinforced by our experience in the 2000s, as private non-guaranteed capital exhibited a strong bias towards high cost, predatory products when it gained significant market share. Moreover, it is important to note that the availability of competitively priced jumbo 30-year fixed-rate loans is based in large part on the existence of deep and liquid markets for Fannie and Freddie securities, which allows private securitizers to finance, rate-lock, and hedge their own securities backed by jumbo 30-year fixed-rate loans.

The jumbo market argument also fails to appreciate the important differences between jumbo financing and the rest of the market. Jumbo mortgages are financed either by lenders who originate and hold loans or through private-label securitization. Most all other mortgages are financed by investors in government-guaranteed MBS. These investors include foreign central banks, fixed income investors and regulated financial institutions, which purchase government-guaranteed securities either because of investment objectives or regulatory incentives. The attraction is that they have essentially no credit risk, don't require due diligence, and are very liquid.

In the absence of a government guarantee, these investors would be looking at securities that carry significant credit risk, require high levels of independent due diligence, and are highly illiquid (particularly after the PLS debacle of the last decade)-in other words, exactly the opposite of their preferences. It seems implausible that these investors would purchase such securities in the amounts necessary to make up the $5.5 trillion in mortgage financing currently provided by the GSEs.

4. Will there be 30-year fixed-rate mortgages in the future? What are the consequences of this?

Under privatization proposals, 30-year fixed-rate mortgages would clearly not be widely available. Some advocates of privatization dispute this claim, primarily based on their availability in the jumbo markets. As I noted in the previous section, that argument is flawed, even more so when it comes to this particular product. The long 30-year duration gives significant interest rate and liquidity risk to lenders. As a result, banks and thrifts have dedicated an increasingly small amount of their balance sheet lending to 30-year mortgages since the high interest rate increases of the late 1970s and 80s. And as explained above, there is likely to be a lack of investor capital for this product from securitization.

Only one other country in the world, Denmark, provides broadly available 30-year fixed-rate mortgages, and the Danish government implicitly guarantees 100% of the market (most recently evidenced in a series of sweeping bailouts, including a blanket guarantee for its entire banking system.)

But why should we want the 30-year fixed-rate mortgage? I have made the argument more thoroughly in a brief I wrote last year, but here are two reasons. First, it provides borrowers with cost certainty in housing, the largest single monthly expense for most families. This is increasingly important in a world where working households are taking on greater amounts of risk and uncertainty. Its value is at its highest during periods of housing market distress-when interest rates are rising and the availability of refinancing options has decreased. Given the high near- to medium-term likelihood of interest rate and house price volatility, this cost certainty will be ever more important to household stability. Second, the 30-year FRM places interest rate risk and others with parties that are better suited to handle them-sophisticated investors who can plan for, capitalize against, and sometimes hedge against them.

5. What does your plan do to fix the problems?

Our plan tries to essentially keep the significant benefits created by the New Deal while reining in systemic risk and protecting the taxpayer from loss. In addition to specific measures designed to encourage mortgage liquidity to underserved communities and borrowers, including for rental housing, what we have essentially proposed is a replication of the FDIC model of regulation, insurance, and resolution around an explicit, very limited government guarantee for certain conforming MBS. We would require firms that receive this guarantee to put up significant amounts of capital (somewhere between 4-9 times the levels currently put up by the GSEs), which would stand against non-catastrophic credit losses. Should these amounts be insufficient, and the CMI effectively insolvent, resolution authority would be exercised and a Catastrophic Risk Insurance Fund, modeled after the FDIC's Deposit Insurance Fund and funded by assessments on the industry, would step in to make timely payment of interest and principal to guaranteed MBS investors.

To be clear, under our proposal investors in government-guaranteed MBS would first be paid from the underlying mortgages that collaterize the MBS. If these were insufficient, they would be paid by the CMI's assets. Only if the CMI's assets were insufficient and it had to be taken over by regulators would the industry-funded Catastrophic Risk Insurance Fund be tapped. And only if this Fund, which would have the ability to tax the industry on a going forward basis to make up shortfalls, went insolvent would taxpayers be on the hook for a single dollar. We think these various firewalls against taxpayer loss, coupled with strong regulatory oversight, are sufficient to ensure that such a loss never occurs.

Conversely, if we privatized the mortgage finance system and handed it over to the largest financial institutions, there would be no protections against taxpayer losses.

6. What happens if we misprice the fee or let regulation go lax?

First, the private sector hasn't shown itself to be particularly good at pricing risk either, as evidenced most recently in the PLS debacle, and we've seen that its losses in today's "too big to fail" era can cause taxpayer losses.

Second, the government doesn't need to price risk perfectly, but to ensure it doesn't underprice risk (and expose taxpayers to losses). Moreover, in the event that a CMI failure caused the Fund level to dip excessively low, it would have the ability to levy prospective fees on surviving CMIs to replenish itself.

Finally, it is worth noting that the government actually has successfully provided similar forms of catastrophic risk insurance in the past, including with the FDIC, the Federal Housing Administration, and the Terrorism Risk Insurance program.

David Min is Associate Director for Financial Markets Policy at the think tank Center for American Progress.

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Part 1: Deliver Housing Support Directly to Those Who Need It

Feb 18, 2011Christopher Papagianis

house-in-hands-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free?

house-in-hands-150In a two-part series, experts will tackle fundamental questions left over from the housing bubble crash: What should we do with Fannie Mae and Freddie Mac? How should we reform the market so that it is fair and risk-free? In the first part, Christopher Papagianis, Managing Director of the New York City office at the think tank e21, argues for full privatization with direct government subsidies to ensure access to credit for all. **Read part two here.

1. What are the GSEs and what went wrong with them?

Fannie and Freddie buy and guarantee mortgages, converting the mortgage payments into guaranteed cash flows for MBS notes and standardizing the notes to enhance investor acceptance and market liquidity. Before they blew up, their investors would capture the guarantee fees on the mortgages and pass through the rest of the mortgage payments to MBS holders. They also used their ability to issue implicitly guaranteed debt to build massive portfolios of the same mortgage-backed securities (MBS) they issued. These portfolios were the source of huge profits during the boom years. The profits came from the gap between the yields on mortgages and the interest rate Fannie and Freddie paid on their own borrowings, which was just slightly greater than Treasury rates thanks to government sponsorship.

The analytical challenge before us is that the most egregious excesses of the previous GSE model are not what precipitated all the taxpayer losses. For example, the first instinct of many reformers would be to ensure that the GSEs (or their successors) are never again able to build big mortgage portfolios. Once a pool of mortgages was converted into GSE-guaranteed MBS notes, there was no need for them to then issue additional debt to repurchase the guaranteed MBS. These big portfolios served "no credible purpose" aside from a profit center for GSE shareholders and management. The second instinct would probably be to strictly limit the mortgages that would qualify for purchase or guarantee.

While both make sense and would have made for sound reform in 2005, focusing on these two issues now more or less ignores the big lessons from the 2006-2010 market meltdown. Of the GSEs' combined $226 billion in losses, over $166 billion (73%) came from the guarantee business. The investment portfolio accounts for just $21 billion (9%) of losses. Had the investment portfolios been eliminated in 2005, the GSEs would have still suffered losses from guaranteed mortgages that would have wiped out their capital base several times over.

For many, the challenge ahead seems to be designing a strategy that maintains a government guarantee for mortgage credit risk while attenuating some of the more egregious elements of the old GSE model. The problem with operating under this framework, however, is that it was the mispricing that arose from the government guarantee itself that really turned out to be the big source of taxpayer losses.

2. Is there a role for the government in the housing market?

Yes. Today, almost all of the new mortgage originations in this country are done with some government involvement. In addition, the government dedicates roughly $300 billion each year to directly subsidize housing, split roughly evenly between tax subsidies and direct government spending. In all, it cuts across several agencies and over 28 different programs to support both homeowners and renters. Given all of the current support that's in place, the real question is how can we comprehensively rationalize the role for government in the housing market.

Unlike the fairly straightforward accounting and (on-budget) treatment of all the different tax provisions related to housing, the subsidies on the spending side are more complex and confusing. On behalf of taxpayers, the federal government issues, guarantees, and insures mortgages. Taxpayers subsidize the redevelopment and sale of vacant properties and foreclosed homes. They subsidize housing vouchers, a public housing program, and at least eight more block grant initiatives for rental housing. The budgetary costs of these programs are measured in three different ways - on a cash flow basis, on a present value basis, and on a present value basis adjusted for market risk. Without an apples-to-apples comparison, it is nearly impossible for policymakers to compare the effectiveness of these programs and to allocate scarce budgetary resources in ways that do the most good.

With regards to Fannie and Freddie, there appears to be a consensus now that the inherent flaw of the "government-sponsored" business was a lack of transparency and accountability in the allocation of the underlying subsidy: profits went to private shareholders and losses were socialized, or ultimately covered by taxpayers. As policymakers review housing subsidies and consider alternatives, they must be careful to make clear the risks and costs of subsidizing housing investment. Government loan guarantees can appear to be low cost since they pay out only if a borrower defaults and official estimates often exclude a premium for market risk. But we have learned that such guarantees are contingent on an accurate assessment of the various risks involved and they can be extremely expensive if those risk assessments are wrong or if the defaults all occur at the same time. Improperly scored loan guarantees also create a moral hazard, as the implementing agencies can assume too much risk by lowering their lending standards over time.

Where possible, it would be more transparent and far more efficient for Congress to deliver housing-related subsidies directly to the homeowner. This is the primary way the government subsidizes food with food stamps or charity through the tax code. Private financial institutions then would no longer have the ability to capture some of that subsidy for their managers and shareholders, as Fannie and Freddie did for so many years. Direct subsidies would also reduce the risk of another economic crisis.

3. What does your plan do to fix the problems?

The government has a terrible track record for pricing guarantees correctly. There are other ways to subsidize housing if that's what Congress and others would like to do. Providing housing-related subsides directly to the individual is probably the only way to avoid the moral hazard that comes with a mortgage guarantee.

Therefore, it appears as though the most promising path for Congress is to commit to a credible strategy that puts the GSEs in receivership and liquidates their operations over a 5 to 7 year period. Taxpayers would cover any shortfalls so no creditor loses anything in a wind-down or is tempted to sell their securities. In the future, Congress would keep Federal Housing Administration (FHA) mortgages available for borrowers under certain income and mortgage loan thresholds and leave the rest of the market to the private sector.

4. Given that there are many plans, what is the strength and weaknesses of your approach?

The strength is little to no moral hazard moving forward. We stop obscuring just how much taxpayers are put at risk by indirectly or implicitly subsidizing housing.

The weakness is that without some other actions by Congress, mortgage costs would presumably go up, as the old guarantees would now be paid for directly by mortgage borrowers.

However, Congress does have some options if it wants to try and offset some of this cost increase. Several scholars have suggested subsidizing interest rates on certain loans or providing a flat housing credit. (See Charles Calomiris and Raj Date for more on how interest rates could be subsidized through swaps. See Josh Rosner for more on how the mortgage interest rate deduction could be reformed to reward building equity over adding more debt and how establishing clear securitization disclosures could help re-start this market.)

5. What will the mortgage market look like if your plan is enacted, for both people who want to lend money and people who want to buy a home?

In the future, prospective homebuyers would still work with banks and brokers to find the best loan for the price. And since nobody is talking about winding down Fannie or Freddie tomorrow, the private market could be folded back into the equation steadily over time. This would give the securitization market time to develop. Obviously, you'd want to make sure reforms were in place as this happened so that the future system would be equipped with the information required to evaluate/measure credit risk over time. Perhaps a covered bonds market could also be started as well. Portfolio lending would also likely increase.

6. Will there be 30-year, fixed loans in the future? What are the consequences of this?

Yes. First, FHA will still offer its 30-year product. Second, I think that 30-year fixed loans will still be available in the private market for borrowers who can extend a meaningful downpayment. The jumbo mortgage market is probably a good analog.

Borrowing in general, however, will probably cost more because there will be no under-priced government guarantee involved to shield investors from losses. This means that some borrowers who qualified for certain loans during the boom would face new and real trade-offs. Put more bluntly, credit would (and should) not be as readily available - compared with the boom years.

Surely, some individuals (or families) will end up renting. Others will save more so they can extend a larger downpayment or purchase a less expensive home.

7. Hasn't TARP taught us that the government will always be some sort of implicit backstop? How can the government ever credibly commit to not jumping in at the last moment?

By this logic, the government should just come out and guarantee most large institutions or even asset classes.

There is a fundamental question that people need to ask when they think about GSE reform and the future of housing finance. Is it in the long-run interests of the economy to provide continued credit support for housing (at least at the current pre-crisis magnitude)? Housing is a form of consumption and its continued subsidization diverts capital from other more productive uses.

This question is also wrapped up in the Too Big To Fail issue. The GSEs proved to be TBTF. Several of the top big banks were also deemed TBTF. In a world without Fannie and Freddie, there is a risk that investors will just assume that the government will step in and protect the banks that are necessary to maintain a liquid mortgage market. I am concerned about this.

Yet, while I do not think Congress solved the TBTF issue with the Dodd-Frank law, I still hold out hope that it will find a solution. I guess I'm not pessimistic enough to concede defeat and just assume that the government will be better off by explicitly taking on all the tail risk in the housing market.

8. If we go with full privatization, we'll see the private securitization market grow as a percentage of total mortgages. But didn't private securitization markets fail in many ways over the past 10 years? Didn't hedge funds and middle-men make a lot of loans that went bad and increased volatility, and won't that happen again?

It is not a foregone conclusion that securitization will be re-born. The alternative to securitization markets - and shadow banking generally - has always been the traditional banking model of funding mortgages through deposits. It may be that the low-cost guarantee written by the GSEs made the traditional banking model uneconomic and that the elimination of this guarantee will make banks more willing to hold loans on balance sheet. We should not be so quick to write off the possibility of greater on-balance sheet lending. The GSEs' portfolios, for example, are a perfect example of its profit potential. The challenge for private lenders had been managing the interest rate risk and attracting funds of sufficiently low-cost to compete with the GSEs.

The future of securitization is likely to be much better than many anticipate. There is little evidence of systematic mis-rating of mortgage-backed security (MBS). The big problems came with CDOs and other re-securitization products. For example, why is it unreasonable for $75 million of a $100 million deal with 400 (high credit quality) mortgages with an average principal balance of $250,000 to receive a AAA rating? For investors in this tranche to suffer losses, half of the mortgages would have to default and suffer loss rates of 50% on average. Subordination of this magnitude is likely to suffice in all but the worst housing environments, as is seen by the surprisingly strong performance of the GSEs' subprime portfolios. Will a CDO market re-start and create new problems? Perhaps, but there does not seem much appetite for mezzanine ABS CDOs at the moment and it seems reasonable to believe the next blow-up will occur elsewhere, given investors' and rating agencies' experience (and new information demands) with regards to these products.

Christopher Papagianis is Managing Director of the New York City office at the think tank e21.

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GSE Reform: What Do We Do with the Housing Market Now?

Feb 18, 2011Mike Konczal

A week ago Treasury released Reforming America's Housing Finance Market, a report to Congress about the future of the GSEs and the housing market. In addition to creating a roadmap for winding down Fannie Mae and Freddie Mac, the plan outlined three approaches to the future of the housing market:

A week ago Treasury released Reforming America's Housing Finance Market, a report to Congress about the future of the GSEs and the housing market. In addition to creating a roadmap for winding down Fannie Mae and Freddie Mac, the plan outlined three approaches to the future of the housing market:

Option 1: Privatized system of housing finance with the government insurance role limited to FHA, USDA and Department of Veterans’ Affairs’ assistance for narrowly targeted groups of borrowers.

Option 2: Privatized system of housing finance with assistance from FHA, USDA and Department of Veterans’ Affairs for narrowly targeted groups of borrowers and a guarantee mechanism to scale up during times of crisis.

Option 3: Privatized system of housing finance with FHA, USDA and Department of Veterans’ Affairs assistance for low- and moderate-income borrowers and catastrophic reinsurance behind significant private capital.

All of these options have strengths and weaknesses. In order to get a better sense of them, I asked two housing policy wonks to explain their approaches and answer some questions.

To discuss Option 1, we have Chris Papagianis, Managing Director of the New York City office of e21, a think tank that aims "to advance free enterprise, fiscal discipline, economic growth, and the rule of law." Here is his testimony on housing finance before the Committee on financial services, and here are things he has written on housing policy debate and GSE reform.

To discuss Option 3, we have David Min, Associate Director for Financial Markets Policy at Center for American Progress, a think tank "dedicated to improving the lives of Americans through progressive ideas and action." Min has written many articles and research papers for the Center for American Progress, including papers on the advantages of the 30-year fixed rate mortgage and Canada's mortgage market. He is a member of their Mortgage Finance Working Group, which has a plan for the future of the housing market titled "A Responsible Market for Housing Finance."

You can read Chris Papagianis contribution here.

You can read David Min's contribution here.

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Where's the Courage? America Must Stand Up to Corporations and Bought Politicians

Feb 17, 2011Joe Costello

raised-fist-150Who will have the guts to fix our broken political and economic system, as we did in the New Deal era?

raised-fist-150Who will have the guts to fix our broken political and economic system, as we did in the New Deal era?

It's hard to imagine the present American economy getting healthy without the housing market being fixed. Even a Dow at 36,000 would have limited impact with housing prices down another 10-20%, as very few in America have any wealth in the stock market, if they have any savings at all. Much of it is in their homes, and that continues to get eaten away. So Chris Whalen's Reuters piece accompanying his downgrading of Wells Fargo due to the continuing mortgage fiasco -- Yves Smith continues with best coverage on this issue -- is well worth the read.

Whalen makes an excellent point about the courts and mortgage crisis. He writes:

The US banking industry would have been far better off if they had allowed sane bankruptcy reform to be enacted with respect to restructuring of first mortgages. Over-burdened home owners could discharge unsecured debt and modify mortgage loans under the watchful eye of bankruptcy judges, who understand how to balance debtor and creditor rights.

Instead banks seeking foreclosure now face state court judges, who are elected by the people in their communities and not used to the intricacies of Wall Street finance. State courts are taking a much harsher line with banks than would federal bankruptcy judges. Banks seeking to conduct foreclosures are being met by a phalanx of judges that now say "show me the mortgage note and prove you are the one with the right to foreclose or I will not act on your pleadings."

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This is a lesson in American democracy 101 -- the separation of powers. The genius of the American system was not to centralize power in DC, but to separate it -- with three branches of government, but also balancing DC with the states, localities, and finally the ultimate power in the citizen, we the people. The agrarian era architecture of our government set up by America's founders always had a hard time dealing with the new industrial era and its most powerful and insidious creation, the corporation. In the 1930s, in response to the crisis of the national/global economy created by the industrial corporation, the New Deal was born, and liberals en masse headed to DC to rule briefly for a few decades. This lasted until the modern corporation and its entrenched interests could gain control, making present DC both eminently corrupt and dysfunctional, a fact our remaining liberals continue to either ignore or discount.

Matt Taibbi has an excellent piece documenting the most open and not even the most egregious of crimes committed by banking and finance, which the complicit powers of DC ignore. No one goes to jail. It reminds me of the California Energy scam 10 years ago, where again no one went to jail and the Clinton FERC sat on its hands as the people of California were fleeced by multiple energy companies and Wall Street. The fact is the American system is broken, but paradoxically its redemption lies in restoring and evolving the system. At this point, what is missing most is courage.

It is time to think much larger than worrying every day about what happens in DC and to liberals. I can only point to a piece in the LA Times yesterday regarding Egypt:

Not wanting to be left out of the future government, two competing groups of young activists are meeting with the military and distancing themselves from longtime opposition figures they regard as inept and weakened from years of oppression by Egyptian security forces.

Joe Costello was communications director for Jerry Brown’s 1992 presidential campaign and was a senior adviser for Howard Dean’s effort in 2004.

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Why Elizabeth Warren Is Still the Best Choice for CFPB Director

Feb 3, 2011Mike Konczal

She's handled staffing and criticism while building bridges. What more could you ask for?

She's handled staffing and criticism while building bridges. What more could you ask for?

The Consumer Financial Protection Bureau just launched its website. Meanwhile, Shahien Nasiripour has a story that found "... if the White House can't get a nominee through the Senate by July, the bureau will lack the authority to supervise nonbank lenders, according to a Jan. 10 report by the inspectors general of the Treasury Department and Federal Reserve obtained by The Huffington Post." One of the main reasons for creating a Consumer Financial Protection Bureau is to close a loophole called "regulatory arbitrage," which lets a lot of these nonbank subprime lenders avoid following the same rules that regular banks do when it comes to lending. So if there isn't a nominee soon, the CFPB is going to encounter a serious problem in doing one of the most important parts of its job.

So it's time to talk about who should lead it. People are currently having this conversation, putting forward potential candidates for the job. I've been following this since the bill passed and, at this point, I think Elizabeth Warren is the obvious choice. Warren is obviously credentialed enough -- a Harvard Law professor who came up with the idea, who has written extensively on the topic and is the third most cited scholar on bankruptcy and consumer-related finances. During the previous debate, there were three major critiques about her running the CFPB: that she wasn't experienced enough in starting a new agency, that she was disliked by industry, and that she wasn't confirmable. Since then she's done an excellent job starting up the agency, hitting the ground running. She has stalemated the critiques from industry and Republicans. And the Republicans have shown that they hate the agency itself but don't actually mind Warren as far as candidates go, so she's relatively more confirmable than people imagine.  She's made as good of a transition from campaigning to governing as anyone would have expected, and then some.

Starting Up The Agency

As for staffing, Warren is managing a team of 150 as they continue to build and launch the bureau. As far as all reports go, she's doing an excellent job. She is under some intense scrutiny, particularly from established regulators and lobbyists, and surviving a round of hostile questioning from a resurgent Republican House. There have been no horror stories. By all accounts, Warren and the CFPB team are getting along with Secretary Geithner and Treasury.

She has signed up Holly Petraeus to work on military affairs, giving the bureau a scope that builds on many different fronts. (The GOP has supported consumer protection bills for the military in the past.) And the most important hire, from my point of view, is former Ohio Attorney General Richard Cordray to help lead enforcement, an AG who is serious about getting to the bottom of the foreclosure fraud crisis. Warren has assembled a fantastic team with few, if any, pitfalls.

While assembling the team, Warren has also contributed to the complicated, yet very important, battle over servicing fraud, helping to veto an ill-advised notarization bill early on. She has been able to staff an impressive team while also contributing to one of the most important, ongoing situations in consumer finance.

Working With Community Banks

As Carter Dougherty has written at Bloomberg, Elizabeth Warren has worked closely with community banks. This has been a conscious effort to include their concerns in the process.

Community banks had two main objections during the fight to create the CFPB. The first was that they didn't need a new regulator because they already had several focused on consumer regulation. The second was that they didn't cause the crisis; the crisis was generated by the shadow banking sectors of fly-by-night mortgage originators, originators that Greenspan could have regulated but chose not to. One can imagine the community bankers being skeptical of someone promising to consolidate regulators, thus upsetting established bureaucrats, as well as taking on something that regulators have ignored in the past.

By all accounts, Warren is making inroads. The whole idea was based on regulatory consolidation from early on. If you look at what Elizabeth Warren wrote for the Roosevelt Institute's Make Market Be Markets conference, it was clear this was a goal of hers. You can see that she gets their concerns in her Politico op-ed, which was well received.

New Potential Allies

Rep. Jeb Hensarling (R-TX) has called the bureau a "consumer credit rationing agency." Reading his critique and other conservative GOP critics on the topic, I'm almost surprised by how impersonal their criticism is. If it was anyone else, they would still be trying to go after the CFPB's budget, scope and independence.

And many Republicans even seem to be warming to Warren. Rep. Randy Neugebauer (R-TX) has said, "She wouldn't be my last choice. I don't know whether she's my first choice, but she certainly wouldn't be my last choice... If [the Consumer Financial Protection Bureau] isn't going away, then what we have to do is deal with what we've got, and I think it's easier to deal with an agency where we have a little bit more permanency about its operations..." Which isn't that bad. She discussed consumer finance in a press release with Republican Senator Snowe. The Wall Street Journal seems almost surprised by how much outreach Warren is doing with the GOP. She has done extensive outreach to State Attorneys General, both Republicans and Democrats. She's emphasized transparency in her work as well. She is as well-respected by the GOP as any effective leader is going to be.

I'm never a good judge of conventional wisdom, but if it's that Warren can't get through the Senate, I think it's wrong, or at least very overstated. I think she'll have a better shot than anyone else. Warren and the CFPB aren't on the tea party's radar, and the Chamber has had real difficulty astroturfing this topic. The left is energized about this nomination, even more so since the strong role the CFPB will need to play in foreclosure fraud and servicing regulations has become clear. So what's the downside of her being the nominee?

Mike Konczal is a Fellow at the Roosevelt Institute.

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FCIC Report: Ownership Society as Bridge to a Permanent Republican Majority

Jan 31, 2011Mike Konczal

While the GOP now tries to blame the crash on government sponsorship of homeownership, it was part of their strategy to turn the country into homebuyers -- and Republicans.

While the GOP now tries to blame the crash on government sponsorship of homeownership, it was part of their strategy to turn the country into homebuyers -- and Republicans.

Brad Miller has a post at Huffington Post called "Republican Amnesia on the Financial Crisis." The important story is that that during the 2000s, conservatives and libertarians hated the CRA and the GSEs because they believed that these institutions blocked or slowed the ability to give loans to poor people. After the crash, the right did an immediate about-face, blaming these institutions for lending too much.

I'm not making that up. Check out the Miller post. I've been documenting this for a while. As Cato put it in 2003, "...by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high." Bill Black walks through Wallison's turnaround on everything, and the GSEs in particular, here and here.

Meanwhile, David Frum is reading the FCIC report. His post on the CRA, "Did Washington Push Banks to Make Bad Loans?," ends with the quote: "George Bailey of It’s a Wonderful Life retired from mortgage lending forever. In the new anonymous securitized market, high-flown liberal egalitarian ideals became the material out of which self-interested and consequence-indifferent financial engineers built the biggest economic bomb since World War II."

Firstly, and the FCIC report emphasizes this in passing, but we had a credit bubble, and bubbles showed up everywhere, not just in housing. Secondly, I'm actually surprised that the FCIC didn't cover deregulation and securitization, considering they do cover the deregulation in the early 1980s that led to the S&L crisis. The private securitization market was the creation of the early Reagan administration, specifically through the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA) in which Congress preempted a variety of state laws that inhibited private home mortgage securitization.

Ownership Society

But to the point, we need to distinguish between the idea that a regulator made the financial system do something versus turning a blind eye while the financial system did it on its own. Regulators didn't step up when the subprime market, the housing bubble, the CDO market, or the shadow banking system were all growing quickly, in part because they believed these things would regulate themselves. Greenspan was certainly of this belief. Being able to say that you were promoting homeownership was a great tagline for both parties, but that's a side effect of letting the market spin out of control.

But are "high-flown liberal egalitarian ideals" the reason that subprime mortgages and homeownership were pushed so hard and got so big in the 2000s, while regulators did nothing? Let's look at George W. Bush's 2004 Ownership Society fact sheet, and what I would characterize as the four-legged stool of The Ownership Society: tax cuts for the wealthy, health savings accounts, privatizing Social Security, and mass homeownership. Homeownership is a big deal in the fact sheet:

...The President believes that homeownership is the cornerstone of America's vibrant communities and benefits individual families by building stability and long-term financial security... The President also announced the goal of increasing the number of minority homeowners by at least 5.5 million families before the end of the decade...

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What he really promoted was homebuyership, not homeownership. But politically, why was this a big deal for Republicans? Egalitarian concerns? As the historian Rick Perlstein found in a 2005 special Ownership Society edition of the American Enterprise Institute's magazine,  Grover Norquist wrote that:

Bush's vision also calls for efforts to increase homeownership. Here's a hint of what that could mean: in House Speaker Dennis Haster's Congressional district in Illinois, 75-80 percent of voters own their own homes. In Democratic minority leader Nancy Pelosi's district in San Francisco, the number is 35 percent... A transition of great political importance is under way. Fifty years from now the move to an Ownership Society will be recognized as a change to America's political landscape as dramatic as the move from farms to factories.

Here's James Glassman:

Bush wants more ownership because he wants to change the shape of America. He understands that people who own stocks and real estate -- who possess wealth of their own -- have a deeper commitment to their community, a more profound sense of family obligation and personal responsibility, a stronger identification with the national fortunes, and a personal interest in our capitalist economy. (They also have a greater propensity to vote Republican.)

Here's more from what Perlstein found in that 2005 American Enterprise Institute magazine (my bold):

The places with the higehst levels of homeownership generally vote Republican.... "Our analysis shows that this connection between homeownership and voting Republican holds broadly at every level--from large regions all the way down to metro areas....more and more of the places offering new homes to young families following their dreams are in the heart of Red America." Not wanting to own your own home is revealed as downright European; Kotkin singles out Prague's homeownership rate at "about 12 percent." No Republicans there! He concludes by calling cities like Fresno, Orlando, Dallas, Houston, Phoenix, Las Vegas, and Atlanta "Our New Cities of Aspiration" -- "the de facto headquarters of the American dream."...

Once more our conservative think tank hammered home the electoral point: "Married couples with families, a key Bush constituency, had the highest rates among all groups: over 83 percent." No wonder Bush won: "Homeownership momentum continued right up to the election. Sales of new homes rose 4 percent in the fall, to an annual rate of 1.2 million units -- the third highest level on record. Sales of previously owned homes also rose to their third highest level."

Especially bustling? California, where first-time homeowners are said to "head for towns like Tracy, Modesto, and Grass Valley. Along the way, many embark on a journey that ends with them voting Republican."

They thought that getting homeownership rates up to 70% would secure a permanent Republican majority. They looked at the data and saw that suburban homeowners are more worried about tax issues, crime, and tend to vote more conservative on economic issues, and they thought they could let the financial sector do its thing and turn a critical mass of swing voters into suburban bourgeois tax-haters. There's an element of the GI Bill and post-war suburbanization in this strategy, which was designed in part by the GOP to get people to the new suburbs and weaken the power of Democratic city bosses.

They actively applauded themselves for pulling off this distinctly political project in their magazines. And then they blame poverty programs and the idea of government when it all collapses.

Mike Konczal is a Fellow at the Roosevelt Institute.

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SOTU: I Think We're Turning Japanese

Jan 26, 2011Mike Konczal

If you listened to Obama's speech, you would think that the recession is over, the financial crisis is taken care of and we can educate out of the rest. You'd be wrong.

If you listened to Obama's speech, you would think that the recession is over, the financial crisis is taken care of and we can educate out of the rest. You'd be wrong.

There are three things you wouldn't have learned from the State of the Union last night. The first is embodied in the chart below. You wouldn't realize that employment is down about 5% from where it was 3 years ago, with millions of people are out of work, dropped out of the labor force, and underemployed. The second is that we have not yet hit the peak rate of foreclosures in this country. Last year 1 million properties were seized; this year an estimated 1.2 million will be seized. The last was that there was a  financial crisis in 2008, steps were taken to remedy it -- including what will be one of the signature legislative acts of the Obama administration -- and the current state of Wall Street is record profits.

Like Jamelle Bouie, I'm surprised by how fast we are moving past the current unemployment crisis. The Obama team has gone from the current to the Future, and must be expecting, or at least hoping, for a turnaround in job creation.

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The speech was well delivered. Although vague, it pointed to a kind of liberal supply-side theory that I think is important to highlight. Indeed, in a non-crisis time it would have been a great vision of the role of government in the economy. But right now we need the government to do different things.

Social Security cuts were not the centerpiece, which reflects excellent activism and writing across many different groups, including Strengthen Social Security, Dean Baker and CEPR, and many others. Though far from over, this is a good first step.

For those who think that better education is the way to get out of this mess, it's worth looking at data (from forthcoming Roosevelt Institute work) on the unemployment rate for 20-24 year olds with a BA (seasonally unadjusted, 4-month moving average):

To put that in words, young people graduating college with large debt loads are entering a brutal job market. Our colleges are no worse than they were in 2007, yet young people are struggling to find work even with strong college investments. Telling the American workforce that they aren't educated enough for the jobs of the future isn't going to actually reconcile with this data.

It's interesting to see how quickly forces are turning this into the new normal, pulling our attention away from the economic crisis. It feels like we are turning Japanese.

Mike Konczal is a Fellow at the Roosevelt Institute.

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