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How to Make Banks Really Mad: Occupy Foreclosures

Oct 19, 2011Mike Konczal

Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

Could the next step after camping in Zuccotti Park be camping out in homes facing foreclosure?

As people think a bit more critically about what it means to "occupy" contested spaces that blur the public and the private and the boundaries between the 99% and the 1%, and as they also think through what Occupy Wall Street might do next, I would humbly suggest they check out the activism model of Project: No One Leaves. It exists in many places, especially in Massachusetts -- check out this Springfield version of it -- and grows out of activism pioneered by City Life Vida Urbana. It is similar to activism done by the group New Bottom Line and other foreclosure fighters. Here is PBS NewsHour's coverage of the movement.

The major goal of Project: No One Leaves is to mobilize as many resources as possible to protect those going through foreclosure and keep them in their homes as long as possible in order to give them maximum bargaining power against the banks. For those focused on "weapons of the weak," this moment -- with banks and creditors using state power to conduct massive amounts of foreclosures, thus impoverishing poor neighborhoods through a financialized rationality -- is a crucial opportunity for resistance. From the webpage:

Post-Foreclosure Eviction Defense. We mobilize tenants and former homeowners living in recently or about to be foreclosed homes (bank tenants) to stop evictions, protect Springfield’s housing and communities, and mobilize bank tenants to fight back against major lending institutions and banks that are tearing our communities apart.

Their model, a two-step process known as the Sword and the Shield, works:

“The Sword”. Encouraging residents to stay in their homes, and to make their stories public, we organize blockades, vigils and other public actions to exert public pressure on the banks. The sword works together with:

“The Shield”: We inform bank tenants of their rights and work with legal services & progressive lawyers, to use aggressive post-foreclosure eviction defense to get eviction cases dismissed, win large move-out settlements (if it makes sense for that family/person), and force the banks to reconsider foreclosure evictions.

They use public action through blockades, protests, and marches, along with smart legal advice on how to maximize legal resistance to forced removal. Beyond the fact that this is a major space for resistance, it is also a great way to mobilize people. And as JW Mason notes, there is power in having a clear opponent as well as a special type of bargaining power people might not realize they have:

On Oct. 23, the FDR Library presents a free forum on FDR’s foreign policy advisers. Click here to find out how you can join the conversation!

Homeowners who still have title have a lot to lose and are understandably anxious to meet whatever conditions the lender or servicer sets. But once the foreclosure has happened, the homeowner, paradoxically, is in a stronger negotiating position; if they're going to have to leave anyway, they have nothing to lose by dragging the process out, while for the bank, delay and bad publicity can be costly. So the idea is to help people in this situation organize to put pressure -- both in court and through protest or civil disobedience -- on the banks to agree to let them stay on as tenants more or less permanently, at a market rent.

But there's another important thing about No One Leaves: They're angry. The focus isn't just on the legal rights of people facing foreclosure, or their real chance to stay in their homes if they organize and stick together, it's on fighting the banks. There's a very clear sense that this is not just a problem to be solved, but that the banks are the enemy. I was especially struck by one middle-aged guy who'd lost the home he'd lived in for some 20 years to foreclosure. "At this point, I don't even care if I get to stay," he said. "Look, I know I'm probably going to have to leave eventually. I just want to make this as slow, and expensive, and painful, for Bank of America as I can." Everyone in the room cheered.

Slow, expensive and painful indeed -- it's like putting the banks through their own version of HAMP. Some may reply, "But wait, aren't foreclosures healthy for the economy? Mitt Romney thinks so." But according to the latest research using discontinuities across state lines, "estimates suggest that foreclosures were responsible for 15% to 30% of the decline in residential investment from 2007 to 2009 and 20% to 40% of the decline in auto sales over the same period." This research is being debated, but the opposite evidence -- that quicker foreclosures help the macroeconomy -- can't be found there or anywhere else.

So does this fit well with Occupy Wall Street's agenda? Given the rampant fraud and abuses in the current foreclosure chain, from manufacturing documents to "robo-signing" to fee-stacking to everything else, the Obama administration's refusal to support a serious investigation is a major example of the government-financial alliance and two-tier system of justice that those in Occupy Wall Street hate. Occupy Wall Street likes to pick spaces that are legally contestable -- like private-public parks -- and draw attention to real conflicts between those with power and those without. A residence post-foreclosure is one of those spaces.

This type of demand allows Occupy Wall Street to tap into already existing networks of foreclosure fighters, avoiding the risk of looking powerless by relying on Congress to do anything. And ultimately, it gets at the banks in a way occupations normally don't: Banks may or may not feel that they aren't appreciated enough because of these protests, but they'll definitely be mad if someone is disrupting their foreclosure mills through occupation and refusal to leave.

Mike Konczal is a Fellow at the Roosevelt Institute.

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The Obama Economy: What Could Have Been

Oct 13, 2011Mike Konczal

Are President Obama and his economic team really victims of circumstance, or were they brought down by their own poor judgment?

Are President Obama and his economic team really victims of circumstance, or were they brought down by their own poor judgment?

Ezra Klein wrote a 7,000 word summary of what went right and wrong on economic policy during the first three years of the Obama administration. It's well-reported and fun to read, and you should check it out. I imagine that the piece will function as a kind of baseline argument for critiquing the Obama administration on the economy from the liberal wonkosphere corner of the blogosphere. I'm going to throw out some critical thoughts below.

The piece is quite consciously avoiding the narrative, storytelling approach to politics and the presidency. It reads as almost the mirror image of something like Drew Westen's approach to how Obama did on the economy -- Obama's passion isn't in question here. Klein's piece is all projections based on available evidence, political possibilities given political constraints, and negotiating with hostile counterparties. As such, there are a couple of ideas-level issues at play that should be made more explicit.

Fiscal Policy

First off, Obama is much more of a fiscal conservative than I had imagined. Or more specifically, he's someone who generally takes Rubinonomics for granted but couldn't shift gears when it came to the largest downturn since the Great Depression. Hence a lot of concerns over the deficit and, more importantly, a real focus on expanding the short-term deficit if and only if it involved closing the long-term deficit.

Noam Schieber at The New Republic was getting word from Treasury as early as late 2009 that it thought that it needed “some signal to U.S. bondholders that it takes the deficit seriously” and that “spending more money now [on stimulus] could actually raise long-term rates, thereby offsetting its stimulative effect.” This naturally led the administration to want to strike "grand bargains" with the other side, a path that led it down some bad roads.

The flip side of this is the administration's focus on "confidence" -- financial markets, Wall Street, and the business community -- as a way of bringing growth up and unemployment down. This has most obviously driven policy in regards to Wall Street and the financial markets (more on that in a second), but we see this in terms of dealing with the deficit. It has also brought in approaches that emphasize positions that are much more "supply-side" -- patent reform, regulation cutting, appointing senior business leaders to key positions, a key State of the Union based on "Winning the Future" through education investments -- that can't be justified as getting us back to full employment. By the time of the debt ceiling fight, these administration talking points were becoming a parody of right-wing talking points and Hooverism.

In Klein's article, he writes that the consequence of misjudging the severity of the recession was not being not able to go back to Congress later. I think a more important problem is that it created a priority for tax cuts over longer-term investments, which would have been better stimulus. I've had staffers tell me on background that members of Congress would approach the administration in 2009 looking to build out huge, New Deal-style infrastructure on a separate track, only to be told that the recovery would be fully underway by the time it kicked in -- thus wasted. There was no response to this. That's a problem given the narrow window they had to operate in the Senate.

Monetary Policy

Ryan Avent has tackled the Federal Reserve problem here. There's a new Federal Reserve iPad app. It is pretty rad. You can click on all the members of the FOMC. You can also click on the two vacant seats and it says that they are vacant:

Even iPad apps are mad at Obama for not being aggressive on the Fed appointments!

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Housing

First of all, the article focuses on a "This Time Is Different" approach to financial crises. One antibody our country had for financial crashes in the 19th century, pre-Keynes, was mass temporary bankruptcy for bad debts. During the 19th century you saw bankruptcy laws passed in the aftermath of bad financial crises to assign the losses and move the economy forward, which were repealed shortly thereafter. This happened with the Panic of 1837, which was followed by a devastating recession.

The Obama administration was either indifferent or hostile to changes in the bankruptcy code -- like cramdown -- following this crash, even though Obama campaigned on it. A technical point: cramdown isn't about making the banks eat the loss; it's about the loss coming from credit writedowns versus a fire sale of a house in foreclosure -- hence cramdown wouldn't raise costs. But either way, in addition to forgetting things since Keynes, we are also in the business of forgetting things from the 19th century.

David Dayen wrote up all the failures in housing policy. The important thing to follow is that the whole housing market approach was predicated on not upsetting the financial sector -- even to the point of not investigating basic unlawful behavior in foreclosures -- so that this "confidence" would get us back on track. Backing the financial sector instead of housing and people turned out to be backing the wrong horse. There's a backlog of housing that isn't going to go anywhere, armies of creditors and rentiers fighting each other indefinitely in the courts, investors wary of investing in a neighborhood when 2 million foreclosures hang over the economy each year, people's lives devastated, etc. Dayen:

The Administration set aside $75 billion through TARP for HAMP, and to date have used $1.6 billion or so on a program that is effectively irrelevant at this point (and they have cleverly revised history to claim that it was only a $50 billion allotment, to make this look a little better). Without any need to clear Congress, the Administration had all the authority they needed to put this $75 billion to work, including the ability to punish servicers who failed to comply with guidelines...

Then, for two years, Treasury swore up and down there was nothing they could do to punish servicers who didn’t comply. Finally, a few months ago, they started withholding incentive payments for noncompliance, as if they just magically acquired the power. It turns out, as Paul Kiel from Pro Publica displayed in a story this week, that Treasury wasn’t even checking on servicer compliance for at least the first year of the program...

The truth that emerges from all of these facts is that the Administration had no interest whatsoever in using more than a token amount of the TARP authority they had already husbanded for mortgage relief and foreclosure mitigation....You can call this the function of bad politics, but I’d say it was more an extension of bank policy, a policy to preserve the wonderful sub-1 percent growth and still-vulnerable financial system we have going for ourselves....Even today there are programs that could be scaled up to work for the mass of homeowners. They aren’t being done not because of some Tea Party-fueled backlash, but because Wall Street would face trouble.

Crisis

Klein's final take is that the Obama team got some right, some wrong, but were ultimately boxed in by failing institutions and a crisis too big to handle.

For a fun counterpoint, Corey Robin wrote in Dissent recently:

My impression of American history was that those presidents universally considered great—Washington, Lincoln, Roosevelt—were beset by crises: the founding of a new nation, the Civil War, the Depression, the Second World War. And far from “balancing crisis management” with their pursuit of long-term goals, the great presidents saw, or found, in those crises an opportunity for reconstructing American politics from the bottom up. It was the crises, in other words, or at least how they handled those crises, that enabled them to pursue their long-term goals.

That at any rate was the final judgment Teddy Roosevelt rendered on his own presidency: that he would never be remembered as another Lincoln because he didn’t have the benefit of confronting catastrophe.  Or so I remember reading somewhere, perhaps here.

Whatever one thinks about Obama, it really makes no sense to say that he can’t be all that his supporters want him to be because of the Great Recession, two (now three) wars in the Arab and Muslim world, a recalcitrant opposition, and so on. Other presidents would have killed for opportunities like these.

Your thoughts?

Mike Konczal is a Fellow at the Roosevelt Institute.

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How the Top One Percent Ripped Off the Bottom 99 Percent

Oct 11, 2011Jon Rynn

wall-street-150As the financial sector sucks up more and more money, the rest of us are left making less and less.

wall-street-150As the financial sector sucks up more and more money, the rest of us are left making less and less.

Occupy Wall Street has put a spotlight on the vast and growing economic inequality in the United States. It now takes its place as a top progressive priority -- perhaps the highest priority it has experienced since the Great Depression.

Underlying this greater and greater inequality is a shift of wealth from manufacturing to the top 1 percent and the financial sector. Over the past 40 years, the sectors of the economy that grew in output share grew very little in employment share -- making more money but paying it to a small group of people. The sectors of the economy that grew in employment share did not grow in output share, meaning that a growing number of workers had to share in a smaller pot of profits. From 1969 to 2007, the richest 1 percent has grabbed 15 percent more of the income of the United States, to a total of about 24 percent. Meanwhile, the manufacturing sector has lost a similar 15 percent of gross domestic product (GDP). This has led to a downward shift in income for the bottom 99 percent.

Let’s look at the shift among sectors of the economy in a bit more detail, because as finance has risen, so have other lower pay sectors. A good way of looking at the health of an economy is to see if there is a difference in how much income a particular sector, such as manufacturing or finance, pulls in -- that is, how much of the economy (GDP) it constitutes versus how much employment it accounts for. You might think of this as what percentage of the economy each working person receives, viewing each sector as a whole. I will call this the “the ratio”: that is, the ratio of the GDP (value-added) share of the economy to the percentage of the employment share of the economy for a particular sector; I will always compare 1968 to 2009 (all data sourced from the Bureau of Economic Analysis).

Manufacturing has historically been the quintessential middle class sector because its share of GDP declined slightly, from 28 percent to 25 percent, between 1948 and 1968 in tandem with its share of employment (its ratio was 104 percent in 1968). Thus someone working in the manufacturing sector made an average income for the economy as a whole -- that is, he or she was right smack in the middle of the middle class. Since 1968, the employment share of manufacturing has been heading down by .38 percent per year, so that it is now 8.7 percent, while its share of the economy is 11.2 percent. The average employee is making about 30 percent more than the average for the economy, most likely because so many of the low-skill jobs were outsourced (along with most high-skilled ones).

At the same time, the finance, insurance, and real estate, or FIRE, sector increased its share of the economy from 14.2 percent to 21.5 percent, while the employment share only rose from 4.4 percent in 1968 to 5.7 percent in 2009. So this sector went from a ratio of 322 percent to 376 percent; for finance alone, the ratio almost doubled from a fairly middle class 116 percent in 1968 to 197 percent in 2009. Real estate always had a ratio of about 1000 percent, which is one more reason, perhaps, that society should not encourage real estate bubbles. Overall, the pot of money has exploded without an increase in payrolls.

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So FIRE took about half of the share of GDP that manufacturing lost while barely increasing employment. The rich got richer.

On the other hand, in what is called “accommodation and food services,” or basically hotels and restaurants, the share of the economy moved from 2.2 percent to 2.7 percent in the 41 years between 1968 and 2009, but its share of employment rose from 4.5 percent to 7.2 percent; the ratio fell from 49 percent to 33 percent. The “health care and social assistance” sector, dominated by the health care industry, saw its ratio decline from 73 percent to 63 percent; its share of GDP rose from 2.8 percent to 7.5 percent, but its employment soared from 3.8 percent to 11.9 percent. The other sector that saw a major decline was retail, which actually saw a decline in economic share from 7.9 percent to 5.8 percent at the same time that its employment share increased slightly from 9.9 percent to 10.8 percent. Call this the “Walmart” effect: driving out mom-and-pop stores, leading to a greater efficiency, but lowering the average wage from 79 percent to 54 percent of the economy-wide average.

If we combine these employment “growth” sectors, GDP share moves from 12.9 percent to 16 percent between 1968 and 2009 but the employment share grows from 18.2 percent to 29.9 percent. The ratio fell from about two-thirds of the average to less than half. More and more Americans are employed by sectors that aren’t bringing in a large share of the economy.

So where did the employment and economic output of the manufacturing sector go? When it declined, most of the income went into FIRE and the top 1 percent, and most of the employment -- such as it is -- went into lower paying service jobs or has ceased to exist.

Counter to conservative ideology, the economic role of the government has actually gone down -- at least when measured, as I have been doing here, by value-added data, which eliminates the effect of transfer payments. From 1968 to 2009, the share of employment for the federal government decreased from 9.7 percent to 3.8 percent, and its GDP share went from 6.9 percent to 4.3 percent, while for the state and local governments the employment share rose from 11.7 percent to 14.4 percent and GDP share went from 7.6 percent to 9.3 percent. So much for “big government." FIRE’s share of GDP is at 21.5 percent, while government at all levels is at 13.6 percent. Sounds like “big finance” to me!

All of these statistics point to the need to understand the “natural history” of the economy. The health of a particular sector of the economy is a relevant political issue, as is how we might change the relative importance of each. I have argued previously that manufacturing is at the center of the economy. If we were to move from a manufacturing sector with 9 percent of employment to 20 percent, the economy would add over 14 million jobs. To achieve a change like that, we need to redirect our resources from the “economic royalists” and top 1 percent to the bottom 99.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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No More False Choices: Christina Romer on Fiscal vs. Housing Policy

Sep 27, 2011Mike Konczal

mike-konczal-newRomer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer refuted four of the most popular objections to President Obama's jobs plan. Any other takers?

Christina Romer wrote an excellent New York Times article on Sunday, "A Plan on Jobs Deserves a Hearing." In it, Romer discusses four objections to the new Obama jobs plan. In keeping with developing a map of demand and supply explanations for the weak economy, I want to specifically address how Romer discusses the different demand-side approaches. First, let's take another look at that demand-side map:

Romer argues for the job plan, which is centered around solutions in the fiscal circle (infrastructure, tax cuts) and doesn't primarily include solutions in the housing circle (except for housing refinancing, which is unlikely to go anywhere). Romer addresses this head-on:

WE NEED A HOUSING PLAN, NOT MORE FISCAL STIMULUS The bubble and bust in house prices has left households burdened with too much debt. Until we deal with this problem — perhaps by providing principal relief to the 11 million households whose mortgages are larger than the current value of their homes — we’ll never get the economy going.

The premise of this argument is probably true: recent evidence suggests that high debt is holding back consumer demand. But it doesn’t follow that the government needs to directly lower debt burdens to stimulate job growth.

Recent research shows that government spending on infrastructure or other investments raises demand even in an economy beset by over-indebted consumers. Another effective approach is to aim tax cuts and government payments at households that would like to spend, but can’t borrow because of their debt loads (such as the poor and the unemployed).

History actually suggests that the “tackle housing first” crowd may have the direction of causation backwards. In the recovery from the Great Depression, economic growth, which raised incomes and asset prices, played a big role in lowering debt burdens. I strongly suspect that fiscal stimulus will be more cost effective at speeding deleveraging and recovery than government-paid policies aimed directly at reducing debt.

We should, however, be thinking hard about whether the president’s stimulus plan is the best one for a debt-heavy economy. It may be too tilted toward broad tax cuts, when bigger increases in government investment spending and more targeted tax cuts would promote faster growth.

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I tend to think there's enough space for advancement on all three fronts, especially as they are three distinct battlefields -- Congress and budgets for fiscal, the FOMC and expectations for monetary policy, and regulators and the foreclosure industry for housing. If all three approaches had to go through one place I could understand the need to pick our battles, but they exist in different spaces with different arguments. As such, I've always thought liberals need to take them all on at once.

But in general, those who think that we have a housing debt hangover think that running a larger fiscal deficit is a good thing. This is a representative argument: "If the private sector is incapable of absorbing all desired savings the government has to jump in – at least temporarily, while the private sector is paying down its excess debts. The government offers savers a safe asset (government bonds) and uses the funds to directly boost aggregate demand."

Or as Richard Koo puts it:

Indeed the key lesson from the Japanese experience is that fiscal support must be maintained for the entire duration of the private-sector deleveraging process. This is an extremely difficult task for a democracy in a peacetime, because when the economy begins to recover, well-meaning citizens who dislike reliance on government will argue that since fiscal pump-priming is clearly working, it is time to reduce (what they see as wasteful) government spending. But if the recovery is actually due to government spending and the private sector is still in balance-sheet-repair mode, premature fiscal

reform will invariably result in another meltdown, as the Japanese found out in 1997 and the Americans in 1937...

Although government deficit spending should be avoided when the private sector is healthy and forward looking, once in several decades when the private sector gets carried away in a bubble and damages its financial health, a prompt and sustained fiscal medicine from the government is essential in minimizing both the length of recession and the eventual bill to the taxpayers.

Romer adds an interesting argument to this overlap -- that the best way to deal with the housing hangover is to boost wages and employment, which can be done through fiscal policy. Unemployment is well-correlated with deleveraging, foreclosures and underwater mortgages, so relief through this channel will go toward the areas most in need. I'd add that even places where there wasn't a housing bubble -- say, Texas -- have very high unemployment rates in excess of 8 percent, indicating something larger at work than simple deleveraging.

I agree with what Romer hints at, that the job plans is too tilted towards tax cuts. Building in infrastructure will have a payout years down the road that will make this an even better investment, but with real interest rates negative we should be getting as much of it out the door as we can until output returns to trend.

With the Romer editorial in hand, what are the arguments against this job bill again?

Mike Konczal is a Fellow at the Roosevelt Institute.

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Mapping Out the Economic War of Ideas

Sep 21, 2011Mike Konczal

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

A literal take on the ideological bubbles that have formed in our economic debate.

For the next few posts, I will allude to an ongoing battle of ideas about what is troubling our economy and what solutions are available to fix it. So it might be a good idea to create a sort of topological map of the clusters of ideas and policies that constitute these arguments, as well as the overlap among them. This is a preliminary version of this map; I’d really appreciate your input about what is missing and how to make it better.

From those who think that the problem is related to demand and Keynesian theories, there tends to be three areas of focus: fiscal policy, monetary policy, and the debt hangover in the broken housing market. One can think all three are important -- I certainly do -- but most think one has priority over the others. Many will think one of the three isn’t in play or particularly useful as a focus of policy and energy. Here’s a rough map of all three. Quotations are ideas, non-quotes are policies, and parentheses are people associated with each:

konczaltopo1

(Click for larger image.)

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The flip-side to a demand crisis is a supply crisis, and there’s been a large effort to explain our high unemployment and below-trend growth as the result of supply-side factors. Having surveyed the arguments, I’ve split them into two categories. There are those who think that the government has created an increase in uncertainty. This results from a combination of deficits that scare bond vigilantes/job creators, new regulations that have killed all the potential new jobs, government-created disincentives to work. The second area of focus is on the productivity of the labor force, with special emphasis on a skills mismatch, the characteristics of the long-term unemployed, and the idea that something has fundamentally changed in our economy that will keep so many unemployed for the foreseeable future.

konczaltopo2

(Click for larger image.)

I’m making the productivity circle conceptually expansive enough to include “recalculation” stories, though I tend not to find these arguments convincing. I suppose I could add a third circle in the next version.

So what did I miss?  What should go in the next version of this chart?

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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Joseph Stiglitz: Government Must Play a Role in the Housing Market

Sep 19, 2011

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."

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."

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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.

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Banks and Business Have Bounced Back, but Consumers Still Struggle to Pay Off Debt

Sep 14, 2011Bryce Covert

While families have made progress paying down credit card bills, mortgage and student debt levels remain stubbornly high.

In the run up to the financial crisis, everyone took on boatloads of debt: banks, corporations, consumers. In the aftermath, most have been eager to pay that debt off and get out from under the burden. Yet some are doing better than others. Corporations are now sitting on cash, having corrected their balance sheets. Banks are faring well after raising capital and selling off assets. But families aren't so lucky.

While families have made progress paying down credit card bills, mortgage and student debt levels remain stubbornly high.

In the run up to the financial crisis, everyone took on boatloads of debt: banks, corporations, consumers. In the aftermath, most have been eager to pay that debt off and get out from under the burden. Yet some are doing better than others. Corporations are now sitting on cash, having corrected their balance sheets. Banks are faring well after raising capital and selling off assets. But families aren't so lucky.

Households have made some progress in lowering credit card debt. According to TransUnion, consumers spent $72 billion more paying those bills than buying things in 2009 and 2010. In the first quarter of 2011, average credit card debt reached a 10-year low of $4,679. And the national delinquency rate (those who are 90 or more days past due on their credit card bill) was at .6 percent in the second quarter of 2011, the lowest level in 17 years.

Overall, household debt has fallen to 2004 levels. But mortgage debt isn't looking as positive as credit card bills. As the Wall Street Journal puts it:

Until the late 1990s, the sum of all American mortgages was about 40% of the value of the underlying homes. Americans borrowed heavily against their houses and then house prices fell. By this metric, the debt burden rose to about 62% -- and hasn't yet come down. (This is an average, of course... About one in five homeowners with a mortgage owes more than 100% of the current value of the house.)

Part of this, the article explains, is that unlike banks, households can't raise capital to pay it down. So to get housing-related debt levels down, consumers will have to see a rise in price appreciation or an increased ability to writedown or modify their mortgages. That, or they'll face foreclosures.

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And we're doing worse than ever before in another category of debt. Student loan debt is set to hit a total $1 trillion this year for the first time ever. Beyond that hefty load, though, default rates are rising. Overall, 8.8 percent of borrowers defaulted last year, up from 7 percent the year before. It gets even worse at for-profit schools, though, where the rate was 15 percent, up from 11.6. And while they only enroll about 10 percent of the nation's undergraduates, those students make up almost half of the defaults. They also tend to serve low-income students, who may already be struggling with the cost of an education.

But the problem doesn't stop there. In fact, it may be worse than those numbers show. The default rates only take a look at a two-year window -- but some studies show that as few as one in five defaults at for-profit colleges occur in that timeframe. Meanwhile, the New York Times reports:

A recent study by the Institute for Higher Education Policy found that for every borrower who defaults, at least two more fall behind in payments. The study found that only 37 percent of borrowers who started repaying their student loans in 2005 were able to pay them back fully and on time.

Banks and corporations may be feeling great about their debt levels, but they would do well to remember that consumers drive our economy. If we're all still buried under a mountain of debt that we can't pay off, the economy will continue to suffer.

Bryce Covert is Assistant Editor at New Deal 2.0.

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ND20 Alert: Event on Fannie & Freddie and What to do About Housing Policy

Sep 6, 2011

alert-button-150Some say Fannie and Freddie were the real cause of the financial crisis. Others say that's baloney.

alert-button-150Some say Fannie and Freddie were the real cause of the financial crisis. Others say that's baloney. But either way, with rampant foreclosure fraud, a housing market still in ruins, and no good ideas about how to reform the GSEs, what to do about housing policy in the U.S. remains an open question. To talk about some potential answers, join the Roosevelt Institute for an event next Tuesday, September 13 in Washington, D.C.

Phil Angelides, Chair of the Financial Crisis Inquiry Commission, will kick things off by discussing the role Fannie and Freddie did (or did not) play in the crash. Then hear from noted panelists including Roosevelt Institute Fellows Jeff Madrick, Rob Johnson, and Mike Konczal and others as they talk about the government's role in housing and how to reform the GSEs. It will all wrap up with a final address from Roosevelt Institute Senior Fellow and Nobel Laureate Joseph Stiglitz.

If you are interested in attending, RSVP by sending an email to Madeleine Ehrlich at mehrlich [at] rooseveltinstitute [dot] org by the close of business on Friday, September 9.

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Obama Could Look to FDR to Tame Housing and Jobs Crises

Aug 25, 2011David Woolner

Unemployed and underwater, Americans need robust, FDR-style federal action.

Unemployed and underwater, Americans need robust, FDR-style federal action.

In a further indication of the weakness of the US economy, the Mortgage Bankers Association reported earlier this week that the number of Americans at risk of foreclosure is rising, while the number of mortgage applications to purchase a home has fallen to a 15-year low -- despite record low mortgage rates. The government also recently reported another sharp decline in the price of homes holding government-backed mortgages, by nearly six percent in the last quarter, the largest decline since 2009. In short, the housing crisis that played a key role in the initiation and perpetuation of the Great Recession is far from over and the risk that the ongoing trouble in the housing market will drag the country back into recession is becoming increasingly apparent.

In the face of these and other grim economic statistics, it has been reported that the Obama administration is considering further government action to help struggling homeowners keep their homes, including a proposal that would allow the millions of Americans who hold government-backed mortgages to refinance at today's historically low rates. The administration is also looking into the feasibility of a home rental program that would help keep hundreds of thousands of foreclosed homes off the market in an effort to stop home prices from falling further.

This is not the first time, of course, that the United States has faced a housing crisis. Nearly 80 years ago, President Roosevelt took office under circumstances not unlike those we face today. In 1933, for example, the non-farm foreclosure rate was running at roughly 1,000 homes per day, so that by the end of that year an estimated 50 percent of all urban mortgages in the US were either delinquent or in foreclosure. The number of housing starts had also fallen off dramatically, from a 1920s high of 937,000 in 1925 to only 93,000 in 1934.

To deal with the housing emergency and reverse this trend, the Roosevelt administration created the Home Owners Loan Corporation (HOLC) in June 1933. The HOLC -- which was a federal entity -- provided immediate relief to families facing foreclosure by buying out their existing mortgage and replacing it with a new one based not on the typical short-term mortgage agreement of the time (usually a non-amortized loan of seven to ten years terminating with a balloon payment), but rather on the far more affordable amortized mortgage of between 25 and 30 years. Over the course of its three-year history, the HOLC refinanced over one million homes or roughly 20 percent of all the urban mortgages in the country. Moreover, by the time the HOLC finally closed its books in 1951, it had turned a small profit, with the result that this remarkably successful mortgage program did not cost the U.S. taxpayer any money.

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In an effort to secure a long-term solution to the U.S. housing crisis, the Roosevelt administration passed the National Housing Act a year later. The housing act established the Federal Housing Administration (FHA), and through it significantly increased access to home ownership among average Americans by insuring loan institutions against default; by institutionalizing the 30-year amortized mortgage; and by establishing other standard criteria, such as the 10 percent down payment, building codes, and on-site inspections of new and existing homes for violations of the newly developed codes. The creation of the FHA had a tremendous impact on the US housing industry, increasing over home ownership from 40 percent in the 1930s to over 70 percent by the end of the century.

Like much of the New Deal, both of the efforts involved direct federal action inspired by a desire to provide both immediate relief and long-term reform. They were also part of a much broader effort to revive the overall economy -- spearheaded by the Roosevelt administration's determination to provide meaningful jobs to the millions of unemployed through such programs as the Works Progress Administration (WPA) and Civilian Conservations Corps (CCC), or the lesser-known Public Works Administration (PWA).

Given the inability of President Obama's Home Affordable Modification Program (HAMP) to reverse the decline in the housing market, it is encouraging to see that the administration is considering further measures to shore up this critical sector of our economy. One would hope that the administration might look towards the HOLC for inspiration as it moves towards further action. But as most economists predict -- and as the New Deal instructs -- a massive refinancing program on its own may not be enough to restore the housing market. What we really need is more jobs -- perhaps a modern version of the WPA -- to rebuild the nation's crumbling infrastructure and further funding for education and job training to restore our competitiveness in the world economy.

With the deficit doomsayers now in charge of our nation's agenda, and with the American public and media hoodwinked into believing that the best way to revive our economy is by cutting government spending, the likelihood of a new federally funded jobs program in the near future is close to nil. This is bad news for the millions of unemployed who will not be able to pay their mortgages -- no matter how low the interest rate -- without the one thing they desperately need: a paycheck.

David Woolner is a Senior Fellow and Hyde Park Resident Historian for the Roosevelt Institute.

 

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On the Obama Administration's Pressuring of NY Attorney General Office

Aug 22, 2011Mike Konczal

Getting to the bottom of the housing crisis is key to economic recovery. So why is the Obama administration trying to block investigation?

Getting to the bottom of the housing crisis is key to economic recovery. So why is the Obama administration trying to block investigation?

Gretchen Morgenson's must-read article, "Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal," reveals how the Obama administration is putting pressure on attorneys general, especially New York's Eric T. Schneiderman, who want to bypass an arranged settlement in exchange for an extensive investigation of foreclosure fraud.

Dave Dayen has an important summary of the key issues and Marcy Wheeler brings up two additional items; both are excellent at laying out the field and are highly recommended. If the rush to a settlement is to help consumers, the federal government has many options already available. This is a problem in which the banks are screwing up at the state level and thus the Treasury can't run to the rescue in the same way. Hence, the application of all influence the administration can get.

A few additional thoughts for those joining this issue at this point:

- To put this in perspective, Michael Barr told Felix Salmon in November 2010 that investigations and strong enforcement were on their way. A week ago, I finally read an in-depth investigation that found that in "a staggering 92 percent of the claims brought by creditors asserting the right to foreclose against bankrupt families in New York City and the close-in suburbs, banks and mortgage servicers couldn't prove they had the right to kick the families out on the street... By robosigning documents and pressing foreclosures without the proper paperwork, banks have attempted to steamroll their way over sometimes-outgunned homeowners."

The investigation was done not by the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), nor by the Federal Deposit Insurance Corporation (FDIC) but by...wait for it...the New York Post. The Post! If the Post is capable of pulling off this investigation and making it public and subject to democratic discussion, why can't the Obama administration?  And this is what the New York AG's office has to deal with: signing a deal absolving and protecting the banks when places like the New York Post are out there finding evidence of massive fraud.

-  Here's a statement we'll refer to as "A": "During the financial crisis period of 2007-2009, the government took extraordinary actions to stabilize and protect the financial markets and industry, and these were the absolute best actions possible given information at the time and the tools available." You and I have our own thoughts on A, but let's assume it is true for this post.

Given A, it is now almost September 2011. It has been almost two and a half years since the Geithner Public Private Investment Program (PPIP) and the Wall Street stress tests were executed. At what point, is Wall Street comfortable enough that it gets to be held accountable for what is going on? At what point does the administration switch from "protect at all possible costs" mode to "hold just a bit accountable in a place with well-documented abuses that directly impact the economy, recovery and people's well-being"? Do we have to wait until 2013?  2020?

-  If you are a general reader of the financial crisis, you probably have a sense of what went wrong with securitization during the bubble. People made sloppy and outright bad loans for huge fees because they could pass them along to people down the line. You may also have a bad sense of what is going on right now in that it involves paperwork and confusion.

I want to emphasize to you that these are the same problem. The same problems on the way up the bubble -- a way of creating, packaging and handling mortgages that was brand new and created agency problems at every stage -- are the same problems on the way down. The documents that hold banks accountable aren't to be found; the special trust laws that allow the infrastructure of these products to work (tax-free) have been made a mockery; and agents have incentives to wealth-strip consumers and dump them even when modifications would be made better from the ultimate creditors' point-of-view.

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-  We do a lot of navel-gazing arguments about "neoliberalism" here, but a very explicit assumption of deregulating the financial markets was that laws and investigations would be enforced when things went sideways. As John D. Hawke Jr., Comptroller of the Currency, said when he announced that he was going to pre-empt Georgia's anti-predatory lending state laws in 2003: "We believe a far more effective approach [than anti-predatory lending laws] would be to focus on the abusive practitioners, bringing to bear our formidable enforcement powers where we find abusive practices -- after clearly articulating our expectations." The trust and property law violations that are at the heart of this couldn't be clearer. It's a dot-your-I's and cross-your-T's kind of law. This abandonment reflects less a different way of setting up the financial markets than an outright corruption of the whole idea of rule-of-law.

- It's reasonable to think that the banks themselves don't know the extent of the problem either and obviously no single bank has an incentive to figure out what it has done wrong over the past several decades. An investigation coordinates this.

- There's no theory outside "weeping job creators" of what is wrong with the economy that doesn't involve the housing market. Getting to the bottom of this, rather than slowly bleeding out consumers and the more general housing market, is essential for getting us back on track.

- Kudos to Eric T. Schneiderman for fighting for this under intense pressures from a Wall Street/Treasury team-up. I can't even imagine what that squeeze is like and it's awful that the administration is on the wrong side of this.

Mike Konczal is a Research Fellow at the Roosevelt Institute.

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