Paul Krugman has a useful and succinct description of the unfolding mortgage crisis. It’s worth a read just to get a grasp on what’s behind the problem. Yet, he has no real solution. This is why I am impatient with his snideness:
True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?
He takes a shot at the administration for opposing a blanket moratorium, but he does so without even considering their motivation except to say that they don’t want to “upset the banks.” This is a repeat of Krugman’s behavior at the height of the financial crisis when he called incessantly for nationalizing the banks without the slightest regard for the legal and financial risks and barriers to doing so.
It’s an attitude echoed by digby. While I agree with her completely about the necessity of accountability and jailtime from the fraudsters, she’s way too casual in saying this:
There is not going to be any easy way out of this. The invisible hand may be working but it often works on a very, very long timeline and many bad things can happen to a society while it does its thing. Meanwhile, every incantation and folk medicine they’ve applied to this problem has resulted in another round of infection. It’s time to open up the wound and completely clean it out. The patient will heal much faster and it’s far less likely to die in the meantime.
I don’t mean to be insulting, but I don’t think digby has the information she needs to make an informed opinion about what will or won’t kill the patient. There is an enormously compelling sentiment in this country (not only on the left) to punish the banksters. But there’s not much consideration of the exquisite difficulty of doing so without punishing all of us. We lost seven million jobs in the blink of an eye when the banks were exposed as insolvent. We could have clawed back some executive pay and thrown some people in jail, and the vast majority of the pain would still have fallen on ordinary folks. We could have let the banks fail, and we probably would have lost another seven million jobs that may take decades to replace.
There’s no political will to do TARP II, so how eager should we be to prove the banks’ insolvency?
To be clear about what is at the root of my complaint, it’s easy to call for creative destruction from the sidelines but the people who have to actually make these decisions have a very weighty responsibility. As a matter of justice and political survival, they should absolutely start putting some people in prison. But as for how they should clean up this mess so that it both fixes the problem and doesn’t cause another wave of mass unemployment? Well, hell if I know. But I’m pretty confident that they aren’t operating on the premise that they can’t upset the banks. They’re operating on the assumption that we need a financial services industry to keep credit flowing and, therefore, keep the economy growing. Lazy snark about ‘extend and pretend’ might feel good, but the gravity of the problem is large and the potential consequences so grave, that calls to lance the wound and take the pain all at once are far too smug.
In the big picture, the moratorium is small potatoes. The real issue is how the document trail issue is resolved. If it is resolved in a way that forces the banks to eat their shitpile in one sudden burst, and there is no will to bail them out again, then we’re back September 2008. But, this time, the ship goes down to the bottom of the sea. So, I guess what I am saying is, be careful what you wish for and don’t be so quick to judge the people who are responsible for keeping us out of a true Depression.
Not to be glib, but when the Allies were rebuilding germany after WWII, there was a tricky problem of who to leave in charge, since the only experienced administrators and most of the successful business owners were Nazis or Nazi sympathizers. This is a more difficult problem because we haven’t fought, much less defeated, large banks or their major depositors.
I agree that people are far too quick to judge the WH, and also to call for policies or actions that would put us in severe financial peril. As much as the bankers are the problem, they are also a necessary bulwark against far worse difficulties. It’s a sticky wicket.
It’s a good analogy. And, remember, many principled people are still criticizing the inadequate denazification of the post-war years. Sometimes, you need the people you should be punishing. In this case, I don’t care about individuals, but institutions. And I don’t care about the institutions in the long-term. They can be broken up if they present systemic risk. But if the problem is risk, you don’t ignore the risk of doing things rashly.
I’m getting a little bit tired of these pundit and blogger fights about tone. It is distracting from good analysis of the real issue. A plague on all your houses.
The real issue is indeed how the document trail issue is resolved. A general moratorium is the only way you can begin to answer this issue. The bad loans on mortgage holders balance sheet are only bad when the foreclosure happens; carrying paper losses through a moratorium is easier to do than foreclosing and forcing more people into real homelessness. The first step is that simple.
We are now at the point at which the bad mortgages are bad because of the delay in dealing with severe and now chronic unemployment.
And we now know that there have been a non-trivial number of cases of fraudulent filings for foreclosure and criminal evictions of homeowners (including theft of their property). These are serious law-enforcement issues that require a moratorium to investigate before any more instances happen.
We are not back in September 2008 unless the mortgage holders are still slicing and dicing mortgages into credit default derivatives and third-party credit default swaps. And if banks have not learned their lesson and are incorrigible, then allowing them another cycle of craziness will not solve the problem.
The “extend and pretend” label was applied to the HAMP program and accurately states what that program was and why it failed.
We need a financial industry to keep credit flowing, but the current way the financial industry is structured has meant that bailout has not resulted in credit flowing. Meanwhile, small community banks have been failing and resolution carried out by the FDIC, resulting in more concentration even among small banks. More concentration moves towards too big to fail.
The banks have been insolvent in real terms for some time, especially considering that there were an estimated $100 trillion in credit default swap obligations for substantially less value than that of mortgages. The house of cards has been coming down for three years now. It is time for individual and corporate investors to take the paper losses for that collapse (it is a paper tax cut) and freeze transactions in the financial sector (a more complicated form of a bank holiday) until actual positions are determined. It is much better for investors to lose paper profits for a short time to sort things out than for homeowners to lose all of their equity and their home because they have failed to pay a mortgage because of unemployment produced by the bubble that the banks themselves created.
It is time that someone in politics said very clearly that people are more important than paper and human persons are more important than corporate “persons”.
The rich have to take the haircut on this crisis. No one else has any hair left to cut.
And Republicans should not be rewarded for perpetuating this situation (as they likely will be). Down that road lies unemployed, homeless, formerly middle class people willing to follow any “strong” leader. The world has been there before. It isn’t pretty.
We’re back to September 2008 if this happens:
It’s probably too expensive in terms of legal fees for individual homeowners to avoid paying their mortgage servicer, even though I’m pretty sure that I could do so legally since our mortgage has sold three times and the paperwork is probably not in order. But people with investment properties might find it economically attractive to simply stop paying their mortgage since no one can legally prove their own it. The immediate problem is hedge funds and pensions. If they claw their money back, then we’re back to Sept. 2008.
I think we’re already quite a ways down that road.
It’s a complicated issue and lord knows being president is a thankless, hopeless job, but I have to think that if the president wants to halt his slide into status-quo irrelevance, he’s going to have to stand up and really stick it to the moneymen. Morally, legally, economically, politically it is necessary. Not saying it’s easy, but sometimes a leader has to do more than accommodate and pragmitize and appease. Sometimes some eggs need to be broken and some heads need to be cracked and damn the torpedoes.
The problem is that a general moratorium brings the housing market to a screeching halt. It affects the small banks and the big banks equally, even when the problem is really with the big banks. My mortgage is with a bank that models itself after an old-style bank – make loans to people with good credit, keep the mortgages within the bank, and plan to make money off the actual repayment of the loan with interest. They’re not going to have these kinds of problems because they did everything right – and a general moratorium on foreclosures could possibly kill their business. And yet big banks like Chase and JP Morgan would suffer not a bit – oh they’d have lower profits for a while and possibly would “be forced” to lay off staff to keep their numbers up. But they have cash on hand to “limp along” until the moratorium is lifted.
The moratorium is the wrong way to go. The right way to go is to get rid of this whole “don’t have to show paperwork to a judge to start a foreclosure” mess, cramdown to help the home owners, legal action by the pension systems and hedge funds and possibly to the DOJ to bring justice to the banks that have been committing fraud, and exercising the new financial regulations to takeover banks that fail because it turns out that they were violating hundreds of years of contract law and the pension funds and hedge funds get to cripple them by forcing them to take back their toxic assets because of that.
The new financial regulations are supposed to prevent a new TARP-like situation because they’re supposed to allow for an orderly dissolving and sale of assets of banks that pre-finreg were “too big to fail”. And that’s a good thing, because there is zero chance that another TARP will pass Congress no matter who gets voted in this time around. The Congress-critters are going to be more inclined to just let it all crash than to risk their political necks with another “bailout”.
THANK YOU TARHEEL DEM.
I get the sense that Krugman thinks all this is as easy as writing a few squares and lines on a chalkboard. My usual disappointment with Krugman is that on economic matters he is very insightful but I find his grasp of the political components very weak.
His “Obama won’t upset the banks” is not only snide but a bit unfair. I would have thought that as a liberal he could have thrown one sentence out that gave Obama a small bit of credit for his recent veto.
He does offer one interesting idea at the end of his piece. But I don’t think it sounds easy to implement legally or politically.
And why did Obama veto it? Because people found out about it and raised holy hell just in time. After all, it passed by a voice vote in both the House and Senate, and since the Pukes are the Party of No, what does that tell you? Something awfully fishy was going on.
Booman, your post is a thing of beauty.
One thing is the new finreg bill prevents a TarpII. No bail out and if I understand it correctly, the big bank that fails, gets liquidated.
Mortgages were first securitized in the late 1970,s and early 1980’s. The information about this is in Liar’s Poker by Michael Lewis.
The FBI was taken off finding out about the mortage fraud and what was going on with the securitized mortages in 2002 by Bush and put into anti terrorism.
This a big ball of wax and it is so complicated that I have no idea how things are going to turn out.
We all know that the laws have to be in place to procecute. The emotional ‘lock them’ up is nonsense. It won’t help the mess the banks have gotten into.
Krugman is a Hillary supporter. I didn’t agree that the US should nationalize the banks and I don’t agree that Obama has handled this wrong.
Obama likes to get the facts and then find out what can be done. This doesn’t satisfy the tizzy crowd.
I have to say about the finacial sector, they really did it this time.
Too big to fail means that too many people in the country would be seriouly harmed if the banks had been allowed to collapse. That goes for AIG as well.
I’m tired of the whining about this.
The mess isn’t simple. It isn’t going to be solved quickly. I think we are still walking in the dark about how far reaching the foreclosure situation is going to be.
The bears are attacking the banking sector as illustrated by the KBW Bank Index US ($BKX),this seems to be the preferred method to bring down the market at this time as it was during the last take down of the stock market. Google had blow out earnings and was up $60.00 at the open and the market sold the news; AAPL is on Monday and if the tech sector doesn’t hold the market up it will come down hard, it can absorb one of these two sectors under performing but not both. When the market has no appetite for risk or financials the big boy’s money becomes in jeopardy,the bears smell blood in the water. There are many levels of good support just below the current price but fear trumps greed every time and the support levels can fall when fear rules the decision making process.
When corporate leadership is underperforming, he market will be underperforming. And we’ve had three decades of stupidity from corporate leadership.
The market is underperforming because the bears are shorting the entire United States of America. They are creating a self-fulfilling prophecy of collapse that will endanger even their holdings.
“B-52” is propping up the market. What do you think QE2 and the POMO auctions are all about?
If you want true nonsense, here it is from the New York Times:
Persistently low inflation is not an problem, but persistently high unemployment is. It is an article of faith among neoliberal economists that keeping people unemployed is necessary to holding down inflation. That conflates labor price increases because of supply and demand with the devaluing of money through a mismatch of the available money supply and economic activity. If unemployment is necessary to avoid inflation, I volunteer the neoliberal economists to be the unemployed.
I don’t think that Bernanke shares the view of the reporter, but I also don’t think that monetary actions can solve the economic crisis (including the mortgage crisis).
The more I think about it, the more it makes sense for the government to spend money to bail out the homeowners with the provision that that money pay off the back debt on the mortgage plus some of the future payments, that the government make whole all of the folks who have already lost houses through foreclosure.
The moral hazard argument does not work in this case any more than it would in the case of the TARP bailout. Most folks who lost their homes were not chronically delinquent payers because they blew off their obligations.
But this is impossible because the Republicans want to capture the Presidency through a coup instead of through honest elections (which they would lose).
“Persistently low inflation” is a code phrase for the risk of deflation.
Thank you for articulating so well what I’ve felt for months about some of the critics of the administration’s actions.
Many of the critics follow the same pattern. Point out a problem, a bad consequence, and using it to prove that the decision was bad, that the motivations for the decision were questionable, evil even. Moreover, never consider the feasability, the consequences (good AND bad), of the alternative.
you know what?
I don’t mean to be insulting, but I don’t think YOU have the information you need to make an informed opinion about what will or won’t kill the patient either.
Your essay seems to boil down to “stop pointing out the emperor’s new clothes.”
lazy snark about “extend and pretend”? Dude, that’s not lazy snark: HAMP has ruined a number of households, putting homeowners in worse shape than they were before. All it did was lengthen the foreclosure process, while telling homeowners a lifeline that was never going to appear was on the way. IT HASN’T WORKED.
I have a lot of sympathy for Obama: he’s trying to clean up Bush’s mess. But from what I’m reading it looks like the banks really really fucked up everything to the point where there’s going to have to be a lot of pain.
It’s as if you’re arguing that no one should point out the gangreous limb, because amputating it will be horrible. I don’t think we’re going to have a choice soon, this isn’t going to fix itself.
Chris Dodd to the rescue!
It’s a huge, serious problem but this just makes me laugh: Chris Dodd will start hearings on this in one month.
http://www.marketwatch.com/story/dodd-hearing-on-mortgage-foreclosures-on-nov-16-2010-10-08
L. Randall Wray in Time for a Moratorium on Mortgage Fraud has some specific proposals. I present them here because they are similar to what I have been arguing:
These are much more specific and helpful that the argument that Krugman makes, which is much too general.
that will almost certainly cripple the economy. And it’s not politically feasible.
He wants to balance the books in one fell swoop. They won’t balance. They will suck everything in like a black hole.
Is he in denial that we’re papering over several trillion dollars of debt held by the banks?
Pull that money out of the economy all at once?
I agree. Tony Blankley said something that I think is right (yes yes, I know: he’s usually a complete shill), and that’s that, for the housing market to recover, it needs to be able to find the bottom. And having millions of homes in foreclosures that have been stayed prevents that “bottom-finding” from happening.
And I would add: Keeping people in homes that they can’t afford doesn’t help anyone — not even those people (except for the period of time they manage to live there for free).
But I heard something else the other day that I thought might hold some promise (I wish I could remember who said it — all I remember is that it was a Democratic politician, I believe running for office) and that was that we need to find creative solutions such as: Instead of simply fining the banks that committed the various fraudulent acts, why not require that they write down the principal owed on the mortgages (and, of course, sign on to a reasonable fixed rate or something)? That way, not only would the banks be punished, but the folks living in the homes would have an increased chance of being able to continue living in them.
Would this be workable?
This is a tough problem. The going down the drain aspect of whole communities in foreclosure is heartbreaking.
My problem with this is I understood the moral hazard of borrowing more than was truly affordable. I didn’t use my house equity like an ATM machine with cash out refi’s. My family lives in a modest house that is within our means. Even if we loose our jobs for awhile our mortgage payment is low enough to get by unless true armageddon occurs.
That said I know their are a lot of people out there who are getting foreclosed on 600K houses when they make 100K or less ( when they signed the papers. ) Those people, a cousin of mine in Lake Forest CA included, were basically renting those homes for awhile waiting for the 5 year recast on their option arm teaser rates to expire ( the ugly thing is those were actually 5 years of negative amortization which increased the principal balance ) These people don’t deserve to keep/squat in their homes. My cousins house was a 3 br nice place but 600K huh maybe 300K but that was just crazy in the first place.
A side note the peak of the market was 2006 into 2007 when the Fed actually started raising rates. The 5 year recasts on the Jumbo loans really haven’t happend yet. There is a lot of sh*t waiting to happend in the upper end still to come.
I have a lot of sympathy for the homeowners who like me tried to do the right thing and then their version of fiscal armageddon happened. I can see the need for helping these people in the ways mentioned. But how do we figure this out? Countrywide did a million mortgages a year during this time and Wamu wasn’t far behind.
A note on HAMP, my wife who is a bankruptcy lawyer in the Philly area does pro-bono work and has been successful via her zealous advocacy to work out a number of loans in Judge Rizzo’s Program
Of course, we already did TARP II. And it has done nothing to ease liquidity which was the stated purpose of TARP I and II. Remember? These have permitted the banks to continue to cover Big Sh*tpile with their fat asses.
So, which is going to hurt the common folks less – letting servicers seize our homes based on legal fiction and government complicity, or collapsing the banks and the economy with it? Which is the easy answer?
There isn’t any good answer, but 50 attorneys general (and the DC Corporation Counsel) see a problem that cannot persist, but somehow Obama continues to maneuver Democrats into looking as if we are on the side of the malefactors of great wealth here. Smells real bad.
This is what I just wrote on Daily Kos in Bobswern’s panic diary:
There are more people running around making wild ass assumptions about mortgage titles and transfers who know little to nothing about how it’s been done (the same way for over 25 years) than there are mortgages. Krugman, bobswern and most of the commenters do not have the detailed understanding of MERS, mortgage transfers and/or the impact to banks on any stoppage of foreclosures. By writing about it with only a little bit of knowledge and a whole lot of assumption is completely irresponsible.
I had posted this but it doesn’t look like it went thru so my aologies if it shows up twice now.
The debilitating assumption is that the worst case will indeed happen. But worst case assumptions are the Wall Street bears’ stock in trade. Krugman and bobswern are reflecting the Wall Street view.
And the worst case is that everyone is going to default on their mortgage or walk away from devalued property. If we don’t come to grips with unemployment in the US, that will be true.
But in fact, it is not operating now like it has for 25 years or state attorneys general are just getting up to speed on the fact that their state laws have been occasionally or systematically (they don’t know which) violated. And it is clear that some foreclosure courts have not taken sufficient time to review cases before issuing court orders. And that some local foreclosure officers of lenders have jumped the gun in sending out eviction agents. And some third parties have successfully gotten foreclosure orders on property that was clearly owned without obligations. But these, as troubling as they are, don’t mean that it is either widespread or characteristic of the industry.
What is true is that there are so many mortgages in default from the bad economy that it is difficult to sort through all of the information, which has become unnecessarily complex because of all of the repackaging for resale. And it is this lack of detailed information that is fueling both the crisis and the worst case scenario analysis of the crisis. Any moratorium is to permit individual states (and banks) to sort out the situation.
If there are indeed $1.3 trillion of mortgages in default, the simplest, quickest, and best public policy move would be to appropriate $2 trillion to (1) backfill state budget deficits and (2) invest rapidly in new infrastructure and training that creates new manufacturing competencies.
Namely, the people, when the real threat is because of the financial/legal system that has been built over the last several decades to acquire and sustain wealth. It won’t matter if every banker disappeas from the face of the Earth overnight because the business artifice they manipulate remains to be used by whomever mans the levers.
Go after the armor, not the knight wearing it.