Some Things that Could Have Been Done in Housing

Ezra Klein wrote a post, What Could Obama Have Done?, with a Part II followup, arguing that you “can believe Obama has made pretty significant mistakes, as I do, but also find yourself pessimistic as to the difference a flawless performance by the president — as opposed to a flawless performance by the Federal Reserve or the Congress — would have made to the economy.”

What are some suggestions for what Obama could have done early in the administration? Brad Delong has some.  I’ll add my own.

1.  Use eminent domain to purchase MBS and then writedown the debts to manageable levels.  Legal, a huge move, but with some precedent in the HOLC.  This would have been Obama’s equivalent of Executive Order 6102.  It would have been an extraordinary action but so is the Recession we are going through.

1.a Indeed TARP was Obama’s Execuitve Order 6102 – he could be funding an infrastructure bank with it right now if he was willing to push it but is choosing against that. It explicitly has the funding he wanted on mortgage relief that hasn’t been spent through HAMP.  He could have done a ton with it. With the exception of the auto industry bankruptcies, TARP wasn’t used aggressively enough.

2 FYI when it comes to protecting the banks, Obama has been willing to go to great lengths to avoid Congress.  Look at the Public-Private Investment Program for Legacy Assets (PPIP) program – often referred to as the early 2009 Geithner Plan. That plan involved using FDIC funds to try and get private money to overbid the toxic assets on the banks’ books.  Though there was the nudge and the public put-option, private capital wouldn’t step up – it’s was a job the government needed to do.  But it was tried and created in such a way to avoid Congress entirely.

As interfluidity said at the time (March 2009):

Is that it, then? You know, the “Public Private Investor Partnership” that the Treasury Secretary introduced on Monday. Are we doing that?

The plan involves the Treasury, FDIC, and Federal Reserve putting hundreds of billions, perhaps more than a trillion dollars, at risk. That should require some sort of Congressional approval, right?

Nope.  It didn’t.  Clearly this wasn’t the intention of the FDIC fund they were leveraging, but Treasury went with it anyway rather than go back to Congress for more TARP for the banks.  And other things could’ve been done along the same lines that involved getting the homeowner market under control instead of shoveling put options and free cash to hedge funds that never showed up.

3.  FHFA could writedown mortgages under safety and soundness criterion with homeowners taking a shared appreciation clause – writedown for a loss now, and then taxpayers get part of the upside later.  As Adam Levitin suggested to me, that structure of shared appreciation would look a lot like the TARP warrants that were given to shadow banks during the crisis.  A TARP for Main Street that isn’t a slogan but an actual policy tool here.  New Bottom Line has additional suggestions and numbers along this approach.

4.  FDR was pretty straightforward about what he wanted the price index and monetary policy to do under his administration and the actions they’d take to bring it about.  Getting the Federal Reserve to go didn’t seem to be a concern for the administration one way or the other.

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11 Responses to Some Things that Could Have Been Done in Housing

  1. If we look at Obama’s deeds and ignore the PR, spin and rhetoric, one thing becomes crystal clear: This administration is of the banksters, from the banksters and for the banksters.

    Just take a look at the raw amount as well as the percentage of total contributions to Obama’s reelection campaign for 2012; both are higher than in 2008 at this stage of the game.

    Hence, any whining about how Obama was a meanie to call the banksters “fat cats” and all this insufferable reich wing crybaby hogwash is mere distraction.

  2. zach says:

    I’d add reduce adverse possession statutory periods to 2 years for non-owner occupied residences. This would make foreclosure much less appealing and it would encourage banks to take better care of their property.

  3. sbanicki says:

    I would ad encourage class action suits by homeownes against banks and wall street. More: http://bit.ly/paBm2i

  4. K. Williams says:

    ” FHFA could writedown mortgages under safety and soundness criterion with homeowners taking a shared appreciation clause – writedown for a loss now, and then taxpayers get part of the upside later. As Adam Levitin suggested to me, that structure of shared appreciation would look a lot like the TARP warrants that were given to shadow banks during the crisis. A TARP for Main Street that isn’t a slogan but an actual policy tool here. ”

    You, like Adam, are totally underestimating the enormous political backlash that a move like this would create. TARP was, after all, enormously unpopular, so modeling a program on TARP doesn’t seem especially wise politically. And it wouldn’t be a TARP for Main Street. It would be a TARP for a select part of Main Street. All homeowners are dealing with the collapse of the housing market and having to make their mortgage payments. It seem utterly arbitrary to declare that if you happen to have a little equity in your home, you have to keep making payments the same as always, while if you’re underwater, you get to pay 20-30% less, and that arbitrariness would only fuel public anger at the bailouts. It’s no coincidence, after all, that the Tea Party was born literally as a result of this issue: giving government aid to underwater homeowners. The kind of program you’re talking about was, and is, a political nonstarter.

  5. Ted K says:

    Mike, I like your blogging in general, nothing personal, but your “eminent domain” idea is just as laughable now as it was when you first proposed it. It’s a perfect example of why lefties are often referred to as clueless daydreamers with no connection to reality. It’s not legal, and even if it was it would have been tied in the courts forever. Almost as dumb as thinking of a corporation as a person.

    President Obama could have gotten out on a stump tour or soapbox tour and gotten the cramdown legislation passed around Summer of 2009. He consciously and intently chose not to do so. That and choosing a tax cheat as Treasury Secretary is why many Democrats will be looking for an independent or a Ron Paul type alternative choice in late 2012.

    I support roughly 85% of your ideas Mike, but unless you’re taking this position to score points with your mostly liberal readership, you just had a major brain fart. I’m afraid it only takes a few views like this (think Peter Wallison’s FCIC dissent) to marginalize yourself.

  6. Pingback: Daily Digest for August 25: The Search for the Silver Lining » New Deal 2.0

  7. Anjon says:

    I do not know anything about the legality of Eminent domain, but I do agree with K Williams that you are underestimating the political backlash of “TARP 2”, even if it was “TARP for main-street”. The initial Rick Santelli Tea Party rant on the floor of the Chicago Merc was specifically on “giving a government bailout to your neighbor so he can build an addition to his house” – even though the entire assertion that anything like that occurred is a myth.

    Ultimately, I don’t see any easy or “clean” way to reduce private sector debts short of doing REAL bank stress tests back in the spring of 2009, forcing them to write down the value of their “assets” and then putting them into receivership if needed. Perhaps if they didn’t suspend mark-to-market accounting until AFTER the stress tests, this could have been easier, but once they suspended mark to market and moved to mark to model, the immediate follow-up question is “which model?”, and the models used by the stress “tests” was “mark to banker imagination”.

    Thanks for brainstorming these ideas ! I think these counter-factual exercises can be much fun, especially as we look back in disappointment at “what could’ve been”

  8. roger says:

    I think these are great suggestions. The framework is important, however. Obama misspent his bi-partisan year. That should not have been the first year. In the first year, he should have been willing to be much more extreme – and your policies are among the ones he could have pushed. As well as pushing lowering the age of medicaid instead of the ACA. He should not have been worrying about covering all the uninsured first – he should have been tying a lower age medicaid model to unemployment and frozen upward income mobility first, which would have given him a space to work on covering the uninsured later, in more advantageous political terms. He should certainly have divided very loudly the Bush tax cuts between the rich and the non-rich, and made sure that the continuation of tax cuts for the non-rich was linked to tax increases for the rich – the latter should have covered the former. He should have suggested two new tax brackets for the upper income level, and he should have proposed that every change upward in the marginal rates of these tax brackets be offset by an equal downward change in the taxes of those makeing less than 250 thousand.
    Of course, these ideas (and your ideas) were not considered by Obama because he doesn’t like this kind of thing. He is a Romney Republican at heart.

  9. Ted K says:

    Off topic: Sorry for the faux pas Mike, I felt this link was important to share with you and your readership.
    Tell the truth I originally wanted to have Yves Smith post this as a link. I sent it to her. I guess she’s too busy running away from the big bad hurricane coming to Manhattan and trying to convince her readers it’s a vacation, as running from a hurricane might break her masculinity “rep”. Either that or I’ve been banned for the same reason many commenters have been banned from her blog: the inhuman crime of disagreeing with Yves. The little brownshirts of Yves’ mind grabbed me by the shirt collar and took me away. The “tares” (such as myself) are regularly ripped out from her comments section and you can tell when you read their daily ditto head homages to her in comments. I don’t recommend that for bloggers who desire an engaged and churning debate of issues on their blog.

    Either that, or she’s royally pissed off I got her book for $11 (that $11 includes the $3.99 shipping). Who knows?? Anyway here is the link and this is highly worthy of note when you connect it with the Koch Brothers trying to dictate college curriculum and dictate faculty staff membership through monetary “gifts” (if you want this $$$$ check then you must do ….. conditional monetary “gifts”) to Universities.
    http://www.latimes.com/news/local/la-me-ucla-donation-20110824,0,2813442.story

  10. Outside of housing policy, Obama could have avoided betraying his base. He could have made the world safer, by prosecuting banksters and torturers. He could have shut down the illegal black site prisons. He could have exposed the sins. At the very least, he could have gone in the direction he promised in his campaign, the direction of his mandate.

    “What would Karl Rove do?” Is there really any doubt that he was positioned in the 2008 election as a Manchurian candidate, to betray his base if he won?

  11. Pingback: Principal Writedowns Are the Way to Full Employment

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