Yale University economist John Geanakoplos said Thursday the failure of President Barack Obama's administration to stem the foreclosure crisis has stymied efforts to jump-start the economy.
"I think that's the biggest mistake of the Obama administration," Geanakoplos said, referring to the administration's failure to convince lenders to reduce the principal on underwater mortgages. "Writing down interest, as the government did, just produced a bunch of people who re-defaulted anyway."
Geanakoplos made his comments at a panel of economists at Yale Law School. He said reducing the principal on mortgages that exceed the value of homes would have made everyone better off by helping borrowers stay in their houses, helping lenders recoup as much money as possible, and helping housing prices recover.
But instead, he said, the Federal Reserve has been stuck with the burden of reviving the housing market when it does not have the power to oversee debt in the economy. As a result, he said, the Fed's stimulus measures have been ineffective: "The rich are getting richer. The Fed wants them richer so that they’ll spend a little more money. That’s trickle-down economics."
There have been roughly 8 million mortgage foreclosures since the housing crisis began, according to Geanakoplos.
Robert Shiller, a Yale economics professor, praised some ideas in the American Jobs Act, while including a backhanded criticism of Obama's economic advisers: "I think Obama has assembled a good team. Now, they're not inspired like [John Maynard] Keynes was to find a deep, major solution to this problem."
Republican politicians also received their share of criticism. Michael Woodford, an economics professor at Columbia University, bashed as "perverse" recent Republican proposals to audit the Federal Reserve, consider bringing back the gold standard, and force the Federal Reserve to focus only on price stability.
William Nordhaus, an economics professor at Yale, said he thinks it's possible that the U.S. will go over the "fiscal cliff," the combination of tax increases and spending cuts scheduled to take effect at the end of the year that may plunge the U.S. into recession. "I don’t think anybody wants to," he said. "But nobody wanted World War I, nobody wanted World War II, nobody wanted to spend 10 years in Iraq. But things happen."