The frustrating thing about Geithner’s Stress Test is that he doesn’t explain why he took the housing policy positions he did when he did, and why he made the housing personnel decisions he did when he did. Instead, he jumps from claim to incompatible claim about his housing policy.
Thus we are left with Glenn Hubbard’s reaction to the housing policy discussion in Stress Test:
About housing… I must say I split my side in laughter because Tim Geithner personally and actively opposed mortgage refinancing…. And now he’s claiming this would be a great idea…
And David Dayen’s reaction to the housing policy discussion in Stress Test:
The guy who handed hundreds of billions of dollars over to banks with basically no strings attached [was] suddenly worried about fairness when homeowners get a break on their mortgage payments…. Even as he says in the book “I wish we had expanded our housing programs earlier,” he completely contradicts that to Andrew Ross Sorkin, saying [that his own] statement is “unicorny”…
And Amir Sufi and Atif Mian’s reaction to the housing policy discussion in Stress Test:
Multiplying $700 billion by 0.18 gives us a spending boost to the economy in 2009 of $126 billion, which is 1.3% of PCE, 10 times larger than the estimate Secretary Geithner asserted in his book. So Mr. Geithner is off by an order of magnitude…
And Andrew Ross Sorkin’s interview with Geithner in which Sorkin asks him about his statement that:
I wish we had expanded our housing programs earlier to relieve more pain for homeowners…
Geithner gets, as ARS politely intimates, less than comprehensible:
Andrew Ross Sorkin: What Timothy Geithner Really Thinks: “When I mentioned the passage in Stress Test in which he regrets…
…that he hadn’t done more [on foreclosure relief] and asked him to elaborate, [Geithner] became feisty:
It’s kind of too unicorny to frame it this way. Because if you suspended disbelief and say: ‘If we had no constraints on resources or authority, could we have done more?’ If we had no constraints on resources or authority, yeah, we could have done more. And we could have done more, quickly.
He added that if they had full control over the government-sponsored enterprises and the Federal Housing Administration, which insures many mortgages, “absolutely, we could have done dramatically more.” He paused for a moment:
But that’s not the real world. In the real world we had to act within the constraints we faced and the limits of the authority we had…
Leaving unanswered Sorkin’s real question: “You said you regretted not doing more. What do you regret not doing?” And leaving unanswered Sorkin’s real follow-up question: “If there was nothing more you could have done, in what sense do you regret not doing it?”
And that triggers my reaction. It is: In the “real world” Geithner did have full control over the GSEs and the FHA–because Paulson nationalized them in the summer of 2008.
In the “real world” Geithner submits his recommendation that Glenn Hubbard be nominated as head of the FHFA to President Obama on January 21, 2009, it is approved by the senate in February 2009, and thereafter there are no constraints on technocratic use of FHFA and the GSEs to rebalance the housing sector and aggregate demand.
Geithner should not say “I wanted the FHFA to act but I did not have the authority to get the FHFA to act” and at the same time say “having the FHFA act would have made no difference”; Geithner should to say “you cannot blame me because of the constraints” when we know that it was his own actions and inactions made those constraints.
Look: Tim Geithner did much better as a 2009-2010 finance minister than any of his peers. Look: the stress tests worked, and worked very well. Look: Christina Romer and company say that if you need a bank rescued in 48 hours, Tim Geithner is your man. But the purpose of Stress Test is to explain to us what Tim Geithner thought and why he thought it, and thus why he did what he did.
And in Stress Test, on housing policy, he doesn’t.
Glenn Hubbard is unhappy with Tim Geithner’s take on housing finance:
Glenn Hubbard: “I saw some of the excerpts about housing and I must say I split my side in laughter because Tim Geithner personally and actively…
…opposed mortgage refinancing, constantly. And now he’s claiming this would be a great idea in the country…
David Dayen is very unhappy with Tim Geithner’s take on housing finance:
David Dayen: Geithner’s sorry legacy on housing: “Hubbard… co-wrote a plan in 2008 endorsing mass refinancing through Fannie Mae and Freddie Mac…
…as a economic stimulus, getting homeowners reduced monthly payments. This was one of the major fiscal policy tools available to the Administration that didn’t require additional spending…. In an interview with Ezra Klein, Geithner plays the classic three-card monte trick of taking credit for every single refinance in the entire country, a number surpassing 20 million. In reality, HARP just hit 3 million refis this February, with the overwhelming majority of them coming after 2012.
In the darkest years of the recovery, failing to engage in mass refinancing, particularly for those underwater homeowners (who owed more on their houses than they were worth) who couldn’t get a refi without government assistance, really missed an opportunity to put more money in homeowner’s pockets that would get spent. On the more critical issue of helping homeowners stay in their homes, Geithner looks even worse…. This was the guy who handed hundreds of billions of dollars over to banks with basically no strings attached, suddenly worried about fairness when homeowners get a break on their mortgage payments….
As for… [Geithner's claim that] HAMP… [was] the best available option, Barney Frank got Hank Paulson to concede to get the banks to reduce mortgage balanaces in December 2008, as long as the Obama transition team would ask for it. ‘We tried to get the Obama people to ask him and they wouldn’t do it’, Frank told New York Magazine. Similarly, despite all kinds of evidence of servicers abusing borrowers through HAMP and using the program as a predatory lending scheme to push people into foreclosure, Geithner’s Treasury Department never sanctioned a single mortgage servicer for failing to meet program guidelines, and never clawed back a dollar of incentive payments. Geithner acknowledges servicer incompetence, but when he had the chance, he did nothing about it…
And I have never seen either Amir Sufi or Atif Mian as furious as they are here:
Atif Mian and Amir Sufi: Why Tim Geithner is wrong on homeowner debt relief: “Tim Geithner has a problem with helping underwater homeowners.
We’re not sure why he hates the idea. He claims he doesn’t like the idea because the economic effects of helping underwater homeowners would have been small. But that is dead wrong. Here is a paragraph from his book:
We did not believe, though we looked at this question over and over, that a much larger program focused directly on housing could have a material impact on the broader economy. Jan Eberly, the assistant secretary of economic policy, took a fresh look at these alternatives later, and her analysis concluded that even if the federal government had borrowed and spent $700 billion to wipe out every dollar of negative equity in the U.S. housing market–a “principal reduction” program of utopian proportions–it would have increased annual personal consumption by just 0.1 to 0.2 percent.”
Let’s evaluate this estimate. And to be as charitable as possible to Mr. Geithner, let’s suppose that the only benefit of principal reduction would be the spending by the underwater homeowners…. If we forgave $1 of debt, how much of that $1 would an underwater homeowner have spent?
This is a very well-researched question. Most place the MPC out of housing wealth between $0.05 and $0.10 per dollar…. Geithner’s assumed MPC… [is] 0.02….
Our research also shows that it is crucial to use the MPC for the right population…. The MPC… [is] $0.12 per dollar for zip codes with many underwater homeowners…. Scale up the $0.12 estimate by dividing through with the homeownership rate in 2009, which was 67%. This gives us an MPC for underwater homeowners of $0.18 per dollar. So a program that targeted underwater homeowners would get an immediate spending response of $0.18 for every dollar. Multiplying $700 billion by 0.18 gives us a spending boost to the economy in 2009 of $126 billion, which is 1.3% of PCE, 10 times larger than the estimate Secretary Geithner asserted in his book. So Mr. Geithner is off by an order of magnitude….
Moar from David Dayen:
David Dayen: Geithner’s sorry legacy on housing: “One smoking gun in the debate…
…is the continued presence, throughout the Geithner tenure, of Ed DeMarco, a Bush-era official running the Federal Housing Finance Agency, the conservator for Fannie and Freddie. DeMarco blocked both refinancing for underwater borrowers and principal reductions for struggling homeowners, seen as the strongest and most sustainable way to keep people in their homes. The administration made no effort to remove DeMarco from his post despite claiming to be at odds with his policies.
In reality, Geithner made the same arguments as DeMarco against principal reduction, most explicitly in a hearing of the Congressional Oversight Panel in December 2009, arguing it would be “dramatically more expensive for the American taxpayer, harder to justify, [and] create much greater risk of unfairness.” Geithner later cited the potential moral hazard of “strategic default,” where homeowners would intentionally not pay their mortgage to get a principal reduction (something that never has and never would happen), to argue against making such modifications mandatory when they made sense for the investor and the borrower.
Keep in mind that this was the guy who handed hundreds of billions of dollars over to banks with basically no strings attached, suddenly worried about fairness when homeowners get a break on their mortgage payments…. In his book, Geithner says that “I don’t think a more compliant FHFA would have produced a dramatically different result,” meaning that whatever differences existed between the administration and DeMarco were immaterial….
Here are a few points to puncture holes in that balloon. On January 15, 2009, Larry Summers wrote a letter to Congressional leaders, promising a “sweeping effort to address the foreclosure crisis,” including a measure to “reform our bankruptcy laws.” This letter was critical to getting the second tranche of bailout money for the banks out of Congress, and yet afterwards, the administration gave little more than token support for the bankruptcy reform, known as “cram-down,” which would have allowed judges to modify terms of primary residence mortgages. Geithner admits in his book that “I didn’t think cram-down was a particularly wise or effective strategy,” meaning that, unless you believe Geithner played no role in administration decisions, the economic team effectively lied to Congress about cram-down to get the bailout money.
Geithner elaborates about cram-down to Klein, saying you would still have to go through a broken servicing industry and the court system to get it done, showing that he has no understanding of the value of cram-down whatsoever. The point, as the Cleveland Federal Reserve makes clear, wasn’t to actually use the bankruptcy process, it was to keep it in reserve it as a threat, to force banks toward modifications instead of a unilateral write-down administered by a judge. The point was increasing leverage for homeowners, and it’s not surprising Geithner wouldn’t grasp that….
Contrary to Geithner’s opinion, there were other options. Glenn Hubbard… suggested a modern-day version of the New Deal’s Home Owner’s Loan Corporation…. Geithner protests that this would be terribly expensive and complex, yet somehow, hedge funds and community-oriented capital groups are doing it right now. The discount on the mortgages would have been higher at the depths of the crisis, meaning a cheaper cost and higher returns at a scale that would have made a real difference…. I hope you can see the fact pattern I’ve built here. At every turn on housing–on mass refinancing, on principal reduction, on leverage for homeowners in the bankruptcy process, on forcing banks to write down mortgages, on a modern-day HOLC–the evidence points to Tim Geithner preferring whatever option put the least pressure on banks, rather than actually helping ordinary people. He made far more excuses to do nothing than any effort to make a difference.
In fact, the programs were never meant to help homeowners, designed only to “foam the runway” for the banks, to spread out foreclosures and allow banks to absorb them. Homeowners are the foam being crushed by a jumbo jet in that analogy, squeezed for as many payments as possible before ultimately losing their home. And I don’t have to just focus on housing; this is indicative of Geithner’s worldview, which sees protecting the financial system at all costs as the only thing that matters.
His pride refuses to allow him to acknowledge mistakes, and the impact on millions of Americans. Even as he says in the book “I wish we had expanded our housing programs earlier,” he completely contradicts that to Andrew Ross Sorkin, saying the statement is “unicorny” and only makes sense “if we had no constraints on resources or authority.” The constraints, of course, were all generated by Geithner…
MOAR Mian and Sufi:
Atif Mian and Amir Sufi: Why Tim Geithner is wrong on homeowner debt relief: “But remember, the effects are far larger than just this direct effect. We know that areas with many underwater homeowners also experienced more foreclosures and higher unemployment. Therefore write-downs of underwater debt would also have had the indirect positive effect of drastically reducing foreclosures and the associated negative effects of foreclosures on the economy. Indeed, followers of our blog know that highly indebted states experienced lower spending, higher unemployment, and even higher usage of food stamps, and many of these effects persist even until today!…
To be clear, we support write-downs that impose losses on creditors, not taxpayers. But the basic point remains–more debt forgiveness would have provided a significant boost to economic activity when we most needed it. It’s not just us that make this assertion. Economists from all backgrounds overwhelming agree with us, contradicting the claims of Mr. Geithner. Here is an excerpt from an excellent piece by Zach Goldfarb:
One year and one month before President Obama won reelection, he invited seven of the world’s top economists to a private meeting in the Oval Office to hear their advice on what do to fix the ailing economy. “I’m not asking you to consider the political feasibility of things,” he told them in the previously unreported meeting…. Nearly all said Obama should introduce a much bigger plan to forgive part of the mortgage debt owed by millions of homeowners who are underwater on their properties.
And if you think these are all liberal economists, here is Martin Feldstein, former economic advisor to President Reagan:
Homes are the primary form of wealth for most Americans. Since the housing bubble burst in 2006, the wealth of American homeowners has fallen by some $9 trillion, or nearly 40 percent. In the 12 months ending in June, house values fell by more than $1 trillion, or 8 percent. That sharp fall in wealth means less consumer spending, leading to less business production and fewer jobs. But for political reasons, both the Obama administration and Republican leaders in Congress have resisted the only real solution: permanently reducing the mortgage debt hanging over America.
Whatever reasons he had for opposing assistance to underwater homeowners, a careful evaluation of the policy effects was not among them. The evidence is pretty clear: an aggressive bold attack on household debt would have significantly reduced the horrible impact of the Great Recession on Americans.
The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession.