Keep People in Their Homes

NDN Backgrounder: A Long Great Recession, No Trust In Wall Street, Carbonomics

With President Obama meeting with his top economic advisers today, NDN is pleased to present some of our recent and most important economic analysis.

  • Thoughts on Wall Street 2.0 by Simon Rosenberg, 4/9/2009 - Roseberg explored the crisis of trust between the American people, the world, and Wall Street.
  • Friedman on a Carbon Tax by Michael Moynihan, 4/8/2009 - Moynihan discusses Thomas Friedman's column calling for a carbon tax and delves into the politics of pricing carbon.
  • Carbonomics by Michael Moynihan, 4/2/2009 - Moynihan looks at the connection between pricing carbon and the future of the American automobile industry.
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

NDN Backgrounder: Looking Ahead to the G-20, the Long Road Back, Fixing Finance

Today, as Republicans release a manifesto labeled as an alternative budget and President Obama meets with CEOs of major banks, we're pleased to present you with some helpful thinking on these issues.

First, though, I'd like to draw your attention to an April 1 NDN event: The G-20 Summit and Beyond: Challenges Facing The Global Economy. This event, to be held at NDN and hosted by NDN President Simon Rosenberg, will feature NDN Globalization Initiative Chair Dr. Robert Shapiro and Dr. Moisés Naím, the Editor-in-Chief of Foreign Policy magazine. Click here to RSVP.

  • Hope and Optimisim II by Michael Moynihan, 3/16/2009 - Moynihan looks at some recent developments in the financial world and sees cause for cautious optimism. 
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

Market Bounces, Overall Economy Remains Weak

Even as Wall Street surged yesterday, the New York Times reports that tremendous problems in the economy remain. The story has some bright points, like slightly increasing retail sales and credit rating downgrades to GE and Berskshire Hathaway that weren’t as bad as expected, but most of the news is pretty grim.

Falling stock and home prices have wiped out four years of gains in Americans' net worth since the start of 2008, according to new data from the Federal Reserve. Nearly half of those losses occurred over the last three months of the year, the biggest quarterly decline since recordkeeping began in 1952.

The new data underlined just how quickly wealth created during the biggest credit bubble in history has vanished, leaving Americans without the college funds, nest eggs and other reserves they had set aside.
...

Americans continue to turn to the government for help -- the number of people filing continuous claims for jobless benefits jumped last week to another all-time high -- and, according to a new survey, foreclosure filings increased last month, despite foreclosure moratoriums imposed by several states and major lenders.

Experts had been hoping filings would level off, or even decline. Lenders such as Bank of America, as well as Fannie Mae and Freddie Mac, which provide funding to banks to offer loans, temporarily halted foreclosures late last year, and some lenders extended their moratoriums through this month as they waited for the Obama administration to release details of its foreclosure prevention plan. That plan, unveiled last week, aims to help up to 4 million homeowners stay in their homes, but it could be months before there's any noticeable impact.

As the recession has deepened, consumers are also having a harder time paying off credit cards and auto loans. Commercial developers and businesses are also struggling to pay their debts. More defaults, combined with the credit crunch, are hurting corporate balance sheets.

Indeed, Wall Street’s collapse has eliminated tremendous wealth for everyday Americans, the effects of which have created a pretty scary feedback loop through the economy. The market will continue to fluctuate, perhaps wildly, over the course of the Great Recession – two of the ten largest leaps in the market came in the Great Depression, and one of the other two came in October. As the saying goes, "even a dead cat bounces."

NDN Backgrounder: Fighting Economic and Ideological Bankruptcy

With new, frightening unemployment numbers out today, take a look at some of NDN's latest thinking on the economy. What government policies are needed to stabilize the financial sector? Why is the Republican minority so obstructionist? How should everyday Americans deal with their balance sheets?

  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

GOP Economic Policy as an Exercise in Grief Management: Denial, Anger & Rush Limbaugh

The leaders of the Republican Party, reeling from their painful string of defeats, seem stuck in two of the classic stages of grief, denial and anger. This week, Rush Limbaugh replaced Bobby Jindal as the leading and most colorful example. Limbaugh may seem like too easy a target, since talk radio always tends toward hyperbole. Nonetheless, the essence of the message from the presumptively addled Mr. Limbaugh is that Americans would be better off if the President’s economy program failed. Even if their homes slip into foreclosure and their kids have to drop out of college, American families would at least escape the degradations of “socialism” or, as another popular conservative pundit put it, “left fascism” (that’s from the hard-right blogger and historian, Ron Radosh).

The rhetorical excesses of talk radio and the Web would hardly be noteworthy, if the same strain of non-thinking didn’t also dominate the Republican Party’s current economic positions. Let’s set the stage: of the three natural sources of demand in a market economy, consumers have stopped spending, businesses have stopped investing, and exports have fallen off the proverbial cliff. That leaves government stimulus as the only possible source of new demand to at least slow the accelerating downward momentum of the economy and most of the people in it. Perhaps the best explanation, then, for why every Republican in the House and all but three GOP senators voted “no!” on the President’s stimulus is, well, denial and anger.

To be sure, economic ideology almost certainly plays a role here, too, on top of their denial (about the consequences) and anger (about no longer calling the shots). This came through vividly at a conference I attended earlier this week for the National Chamber Foundation. My panel was asked to talk about whether the Administration’s plans foreshadowed a permanent change in the relationship between the public and private sectors. Set aside the fact that the leaders of the central private institutions in this drama, big finance, have begged Washington to amend that relationship long enough to preserve their jobs and the assets of their bond holders. 

At the panel, a well-turned-out executive from a major private equity company (and former Bush Treasury official) laid out what once could have been the reasonable conservative position -- stimulus weighted to tax cuts, a banking rescue that avoids taking over anybody (or dictating anybody’s compensation), and tax-based measures to reduce foreclosures. As a matter of economics, he got his targets right, even if his approaches are weaker than those favored by the Administration. But at least his response suggested that he wants the economy to recover, regardless of who gets the credit. 

Not so from the other member of the panel, Brian Westbury, who on top of being an economist with a Midwestern financial advisory is also the economics editor of the American Spectator and a frequent writer for the Wall Street Journal. He provided an economic-cum-ideological gloss for the denial and anger expressed by the flamboyantly-frustrated Mr. Limbaugh. Westbury’s prescription was no stimulus, no banking rescue and no program for foreclosures. The only constructive government action he could imagine was to jettison current “mark-to-market” rules. Those rules say that the balance sheets of banks and public companies have to reflect the actual market value of their assets and liabilities. So, for example, when a mortgage-backed security goes bust, you have to write down its value while preserving the liability of the money borrowed to purchase it and still owed. 

In this view, none of what seems so important to the rest of us -- collapsing demand, investment and trade, huge job losses, rising bankruptcies -- matters for government policy.  The only thing Washington should do here is to change how the financial losses from these events are reported. This isn’t economics; it’s a prescription that follows from a hard-edged ideological view that government can do nothing of value for an economy, regardless of conditions.   

Unhappily, this cramped understanding isn’t limited to the pages of the American Spectator and the Wall Street Journal op-ed page. Bobby Jindal put the Republican Party on record for much the same view in his awkward response to the President’s address to Congress. He even cited the colossal inadequacies of the Bush Administration’s response to Katrina as proof that the private sector is always the best answer to any problem or catastrophe -- even if it’s under water at the time.

I honestly can’t believe that they’re really so dull-witted. A better explanation for Jindal and Limbaugh, along with commentators like Westbury and Radosh, is that they’re still grappling with the grief of losing the support of the American people -- and the power that came with it. They’re stuck in denial and anger. And that’s a very bad position from which to consider the best policies for a nation and world economy in crisis.   

NDN Economic Backgrounder: The Road to Recovery

With news today that last year's fourth quarter was even worse than expected, take a look at some of NDN's lastest and important thinking on the economy, from thoughts on the President's budget and housing, and financial stability plans to visions for creating a 21st century economy:

  • The Economic Logic in President Obama's Speech to Congress by Dr. Robert Shapiro, 2/27/2009 - Shapiro breaks down President Obama's address to Congress, pointing out that the underlying logic of the President's agenda springs from the fierce new challenges Americans face under globalization to their jobs and incomes.
  • Financial Stability: Plan Z by Michael Moynihan 2/23/2009 - Moynihan lays out a plan of last resort for financial stability, noting that it might not be pretty, but it could be necessary. 
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.
  • VIDEO: Dr. Robert Shapiro yesterday faced off against former Congressman John Kasich on the President's budget. The outcome was never in doubt.

The Economic Logic in President Obama’s Speech to Congress

President Barack Obama's superb address Tuesday night had an underlying, unifying logic which some may have missed, but which hopefully those reading this will recognize.  

First, on the financial and economic crisis, he embraced the three basic steps we have urged since last September: on top of a stimulus aimed at long-term investments and helping the states – that’s now done – there will be new requirements that banks getting help from taxpayers use that assistance to expand their lending, and new steps to keep people in their homes and bring down foreclosure rates. It’s just economic common sense – but that’s precisely what most of official Washington casually casts aside in favor of scoring short-term, political points. (Take a look at Gov. Bobby Jindal’s empty and sneering response to the President’s speech. His repeated citing of Katrina as a model for government action, by itself, should be a career-ending act).

The President also laid out a domestic agenda for the rest of his first term, and it looks like the most sweeping since FDR and LBJ. I suppose that personal blogs, by definition, are no place for humility, so here it is straight. The three cornerstone Obama initiatives -- slow down our fast-rising health care costs, expand energy conservation and our use of alternative fuels, and give everybody new chances to upgrade their working skills -- are the exact prescription laid out more than a year ago in my book, Futurecast: How Superpowers, Populations and Globalization Will Change the Way You Live and Work. It’s also been a regular theme of this blog and a series of papers issued by NDN.  

Here, too, it’s just economic common sense, for a world being transformed by globalization.  The underlying logic of the President’s program springs from the fierce new challenges Americans face under globalization to their jobs and incomes. Globalization has made competition much stronger, and that competition leaves American businesses and their workers in a bind. Their costs have been rising very fast, especially for health care and energy, but intense global competition makes it harder for companies to raise their prices to cover these rising costs. The result is that the wages of most American stopped rising since about 2002, even as they became more productive. And most can’t find higher wages by getting new jobs, because before the current crisis began, the same forces had made this period the weakest for job creation since World War II.

The President understands that coming out of the current crisis isn’t enough, if we just return to another period of growth without wage gains or healthy job creation. He also understands another theme of Futurecast and NDN's work, namely that about half of Americans also need new skills if they aspire to jobs with a real future. That’s the basis for the third plank of the domestic agenda he laid out last night -- genuine, new access for young people to go to college or receive other, post-secondary training, and new opportunities for everyone else to upgrade their skills

President Obama’s first speech to Congress already ranks as the most serious and thoughtful presidential address on the economy in decades. Perhaps it took an historic crisis to break through the political cant and mental laziness that has gripped our economic agenda for so long. But the President is using this moment to put forward not only meaningful answers for the crisis, but serious, long-term remedies for much deeper economic problems which other politicians routinely ignore. That’s presidential leadership of the sort we haven’t seen since, well, FDR.

Financial Stability: Plan Z

New York City - In the two weeks since floating by Treasury of a financial stability plan, markets have fallen almost every day, culminating in new lows on Friday that have wiped virtually all the gains of the last expansion.  Hardest hit have been bank stocks which on Friday plumbed new depths.  Over the weekend, the New York Times endorsed bank nationalization and Citi evidently approached the government about more aid. Besides the banks, the big losers are the American middle class who placed their nest eggs in the stock market.  The financial stability plan has unsettled markets because uncertainty exists over whether it will work.  In the spirit of thinking creatively about difficult problems, here is plan Z.

First, a brief recap. Plan A was the Super SIV, a fund to be created by the banks themselves that fell apart over sharing the cost.  Plan B was for the Fed to extend its lending in unconventional ways.  Plan C was to seize problem institutions such as Freddie and Fannie.  Plan D was selling faltering banks to strong ones as in the forced sale of Bear to Chase.  Plan E was let the market decide as in allowing Lehman to fall.  Plan F was to rescue AIG or one off rescues.  Plan G was to extend Fed credit to banks.  Plan H was the TARP to buy up all the troubled assets, which fell apart over pricing the assets.  Plan I, which was carried out, was to inject capital into the banks to shore up their solvency.  Plan J was to announce that the TARP would not be used to buy up assets. Plan K was to imply that the government would be ready to bail out any troubled institution.  With many wrinkles in between we get to the two current plans, the Treasury plan and bank nationalization.

The Treasury plan calls for creating a public private partnership to buy up the toxic waste.  The private participation is needed because Congress is not inclined to appropriate the one or two trillions needed to buy the troubled assets and recapitalize the banks.   The question is whether the private investors will step up to the plate.  Nationalization, the other proposal, would give the government a freer hand in sorting assets into good and bad.  It would not necessarily cost less assuming the government honors the debts of the banks, however.  And it comes with negatives, the shock of nationalization, cost to common shareowners  and the prospect of state ownership of risk taking institutions.  So what to do.

Here is Plan Z.

There is one player left in the world with a lot of buying power. The Federal Reserve.  As Congress sweated the details last year of the $700 billion TARP, the Fed was guaranteeing and lending larger sums against unconventional collateral including commercial paper and mortgage-backed paper through the TAF, TSLF, MMIFF, TPLF and similar programs.  This underscores the fact that the Fed is comparatively unconstrained by politics.  

The Fed, like other banks, has a balance sheet.  In normal times its assets consist of very high quality stuff, including gold, deposits at the IMF, and cash.  In the last year, it has doubled its balance sheet by adding unconventional things.  Wouldn't it be worth adding another trillion to solve this crisis once and for all?

Let the Fed issue fully guaranteed credits to the banks in exchange for their troubled assets.  For clarity, the trouble assets should go into a separate tank, shares of which the Fed would hold.  This instantly makes the banks sound as a pound (forgive the metaphor). The Fed ends up with a lot of troubled assets that may be worth from 10 cents to 90 cents on the dollar.  Time will tell.  But the point is, this simple stroke would allow the banks to resume lending with confidence.  And it would transfer risk to the one party in our financial system best able to handle it. 

The downside is that the Fed is the one party that you don't want to take risk under ordinary circumstances.  Make no mistake, while being in effect an accounting entry at the Fed, this would be one huge entry, increasing its balance sheet by about 50%.  So the next question is how to minimize the risk to the Fed.

Once sequestered within the Fed, the trillion or more of bad assets could be gradually sold off to investors, (not to banks) and any shortfall between the face value and the market (which should eventually recover) be paid for by appropriations as insured by a government guaranty.  However, rather than requiring the taxpayer to put up 1 trillion at once, plan Z would retire the shortfall over time, perhaps over ten years of annual appropriations. 

This plan, by the way, is not that different from the one used by China a decade ago to escape a raft of bank failures.

Since these toxic assets happen to be exotic mortgages, the final way to reduce the ultimate losses would be to refinance them with a 4% government guaranteed mortgage or, at a minimum, standard fixed rate Fannie Mae mortgages now going for about 5-6%.  This would have the benefit of ending the uncertainty over exotic mortgage resets and freeing up demand in the economy.

It's not the first thing one would try.  But by addressing the problem in one fell swoop it may beat all others.

The Dukes of Moral Hazard

I’d imagine that everyone has seen Rick Santelli’s absolutely absurd tirade on CNBC yesterday, but in case you haven't:

Santelli's tirade is remarkable for his anger about (amongst many other things) the idea that the Obama mortgage plan throws the concept moral hazard to the wind. According to Santelli's line of argument, people are now going to make irresponsible decisions about their housing and general economic behavior because of this government policy. And he’s getting cheered by a bunch of stock traders behind him.

The irony (as if there's only one) is that much of his cheering section had long ago thrown caution to the wind, as they took tremendous risks, many of which were premised on the notion that, if things got really bad, government salvation was a foregone conclusion. Big banks knew they were too big to fail; the financial world felt invulnerable. And I didn't hear them complaining about moral hazard when now more than a trillion dollars has been thrown at these banks, which makes the Obama housing plan, which will affect 8-10 million Americans and cost $75 billion, look cheap.

In the current economic climate, moral hazard has become a convenient piece of poorly understood economic theology that critics of any given government plan use to oppose it. The economy is in such shape that being overly concerned with this theology is folly. Policymakers need to focus on pragmatic solutions that fix these incredibly serious problems with the economy, including the housing market, in large part because figuring out the incentives that will nudge Americans’ behavior in the proper direction in incredibly complex markets is not going to happen by tonight’s closing bell.

David Brooks writes on this today as well.

Update: Press Secretary Robert Gibbs delivers harsh words for Santelli at today's White House press conference. Then Gibbs offers to buy him a cup of coffee -- decaf.

Tackling the Mortgage Mess

Yesterday, President Obama unveiled a $280 billion plan to address the mortgage crisis.  As we at NDN have long argued, the financial and now economic crisis began with mortgages and addressing the foreclosure crisis is critical to resolving them.  The package unveiled yesterday was large and bold.  Here are my thoughts.

The plan follows the three pronged structure I proposed earlier this year of first, developing a simple, national modification plan, second, permitting judges to modify mortgages in bankruptcy court and third, allowing people to refinance out of unsustainable higher interest mortgages into sustainable ones.  of these I argued that the third piece was the most important. 

With respect to modification, the Administration has essentially taken key terms of the loan modification in a box program of FDIC, extended it and offered a new carrot to banks in the form of direct subsidies if they modify mortgages.  $75 billion is allocated to lower monthly payments to a percentage of income.  This modification program remains, however, voluntary.

The plan has also endorsed allowing judges to modify mortgages in bankruptcy court.  As a practical matter, a key effect of this would be to give borrowers more leverage in bankruptcy court and therefore encourage lenders to make a deal.  This proposal will, however, require legislation. 

Finally, we come to the issue of allowing people to refinance out of problem mortgages into sustainable ones.  The President's proposal dramatically increases to $200 billion the funds available to buy FHA mortgage securities in the secondary market and hence encourage refinancing and purchase of homes by lowering rates.  This is certainly a good thing.   In turn, it will allow holders of "conforming" FHA mortgages--those under 417,000 or 730,000 in some high cost areas to refinance more than 80% of their home value, ending the need for Private Mortgage Insurance or the PMI that adds to one's monthly payment.  It will be easy for the government to effect this change as it now controls Fannie Mae.  Indeed, an advantage to both proposals in terms of acting quickly is that they require no action by Congress.

The proposal yesterday stopped short, however, of endorsing a 4% government guaranteed mortgage as I advocated that would have let far more people refinance out of problem loans into sustainable ones.  Instead, by using the existing Fannie Freddie format, it will allow some people to refinance at the normal Fannie rate which now runs at about 5-6%, but only people that already hold FHA mortgages.

Here are my thoughts.  The plan is a solid one that can be put into place relatively quickly.  It will keep many people in their homes.  It will not, however, lead to the wholesale retirement of the unsustainable exotic and often deceptive high rate mortgages--and securities and derivatives based on those mortgages--that continue to riddle the mortgage system.  As loans taken out in 2006 and 2007 reset in the next few years, these exotic loans will create further systemic stress.

Apart from my continued support for a 4% mortgage to completely retire and clean up this unsustainable chapter in American home lending, I would recommend one tweak to the proposal.  As it continues to flesh out details, the Administration should extend the same terms it is extending to FHA loan holders to anyone holding a non FHA mortgage in order to retire as many problem mortgages as possible.

In coming months, we will see if the voluntary plan and subsidies being provided to banks are adequate to see large scale modification.  If not--and if the Administration decides it wants to work with Congress to legislate in this area, the 4% US guaranteed mortgage remains the best way I can envision to retire unsustainable mortgages, clean up the balance sheets of banks, lower family payments and free up demand in the economy.

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