Lawrence Summers and Obama's Clueless Housing Solution
What's with these guys who run the world economy into the ground and then have the chutzpah to lecture us on how to fix the situation? Who really takes them seriously?
In an effort to defend HAMP, the recently proposed overhaul of his former boss's abysmal housing refinance program, the man who ran the Treasury under President "more home ownership" Clinton offers some advice on how to fix the housing market. In the rag of big government known as the Washington Post, Lawrence Summers penned an editorial which pins down the cause of the housing bubble but fails miserably at offering a credible solution. Get ready for some laughs:
The central irony of a financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it can be resolved only with more confidence, borrowing and lending, and spending. This is true, above all, of housing policies. Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) whose purpose is to mitigate cyclicality in housing and that today dominate the mortgage market, have become a textbook case of disastrous and pro-cyclical policy. [My emphasis.]
Right out of the gate, Summers comes out as fool. He diagnoses the cause of the housing crisis only to recommend the same prescription that caused the dilemma to begin with. Like a patient who is losing too much blood, Dr. Summers recommends that massive blood loss be cured by...you guessed it: more blood loss. He makes no mention of the Federal Reserve and the abundant credit and artificially low interest rates that fueled the crisis. Keynesian apologists never acknowledge the printing-press elephant in the room; such would be the equivalent of blasphemy.
Here comes the 5-point solution:
Unfortunately, for several years policy has been preoccupied with backward-looking attempts to address the consequences of past errors. While the focus has been on helping individual homeowners, decisions that are ultimately more important regarding the GSEs have been left to their conservator, the Federal Housing Finance Agency, which has taken a narrow view of the public interest. The FHFA has neglected its conservatorship mandate to ensure that the GSEs help stabilize the nation's housing market.
Since Congress, along with Presidents Clinton and Bush, pushed the FHFA with the Community Reinvestment Act to lend to borrowers who would normally be unable to obtain a mortgage on a true free market, the FHFA should have done more "in the public interest." How so, you might ask? Summers, being a true political technocrat, doesn't say. Talking points work too well with gullible audiences.
First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations.
Again, Summers makes the illogical claim that the solution to an overabundance of risky lending to borrowers with low credit standards is even looser standards:
From the perspective of the guarantor, as distinct from the mortgage holder, lower rates are all to the good since they reduce the risk of default. The GSEs, however, have made refinancings very difficult by insisting on significant fees and by requiring that any new refinancier take on all the liability for errors in underwriting the original mortgage at a cost to American households of tens of billions a year.
So the GSEs, which have essentially been nationalized, should waive fees for refinancing, which in turn would cause a loss in revenue and an increase of government spending down the road? When all else fails, have bureaucrats give out taxpayer dollars!
Third, stabilizing the housing market will require doing something about the large and growing inventory of foreclosed properties. Aggressive efforts by the GSEs to finance mass sales of foreclosed properties to those prepared to rent them could benefit both potential renters and the housing market.
I can do one better; let housing prices drop till the market clears. No need for more paper-pushing by Fannie and Freddie employees; let the market take care of it, like it should have done, much more efficiently and less expensively, years ago.
Fourth, there is the issue of preventing foreclosures, the initial focus of housing policy efforts. The right way forward is far from clear.
Admittedly, this is very true. The foreclosure process has been wrought with many legal nuances that are anything but simple to vet out and solve. Some have been wrongly kicked out of their houses after making mortgage payments on time for years. But this is just another consequence of an asset bubble fueled by government's perverse incentives and cheap credit from the Federal Reserve. It could take years to sort the foreclosure mess out in court, but the sooner it happens, the better.
Fifth, there were clearly substantial abuses by financial institutions and most everyone in the mortgage industry during the bubble. Just compensation to the victims is a legitimate objective. But allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending. A rapid resolution of disputes is equally in the interests of bank shareholders and the housing market. The FHFA should be striving to rapidly conclude this period of uncertainty.
The evidence is shaky on how much "abuse" really occurred, but there is no need to include the FHFA in this process. It has caused enough trouble already. You don't bring the dog to the negotiation table for two neighbors disputing who should pay for torn up shrubbery.
Other players in housing policy could also help. Bank regulators could facilitate inevitable restructuring of underwater mortgages by requiring banks to treat second mortgages and home equity loans in realistic ways. The Federal Reserve could support demand and the housing market by again expanding purchases of mortgage-backed securities.
Assuming regulators have perfect knowledge on what is a "realistic value" (I have a bridge to sell you if you think they do), these public servants have proven inadequate and corrupt thus far in handling the crisis. As P.J. O'Rourke suggested, don't give teenage boys whiskey and a set of keys to the Mustang. To finally prove his Keynesian credentials, Summers advocates for more money-printing by the Fed as if that hasn't done enough damage already.
Judging by Summers' wildly unsuccessful estimate that Obama's first stimulus package would keep unemployment below 8%, only a dope would take his advice now. This is why he is featured in the Washington Post. My suggestion on how to fix the housing market is much simpler: don't listen to the likes of Summers. As a former president of Harvard, maybe he can find a professor to give him an A for effort instead of the big fat F he so rightly deserves.