As we start the New Year, the executive branch and Congresscontinue to pretend the gravest risk to our economy and social stability doesnot exist: the ongoing foreclosure crisis. The financial crisis began with thehousing crisis and it will not end until we resolve housing. Governmentpolicymakers who seemingly ignore this basic fact are leading the nation toanother potential catastrophe.
Last week, a number of important events occurred inWashington, including important recess appointments by President Obama.However, the most noteworthy event did not make front page news:
This represents an extraordinary action and underscores boththe seriousness of the continuing crisis and the absence of meaningfuldiscussion of the problem in Washington. Bernanke's memo reviewed federalactions to date and effectively concluded that they were unlikely to solve thisnational tragedy. The memo
The challenges faced by the U.S.
housing market today reflect, in part...a persistent excess supply of homes on
the market; and losses arising from an often costly and inefficient foreclosure
process (and from problems in the current servicing model more generally)...
Absent any policies to help bridge this gap, the adjustment process will take
longer...pushing house prices lower and thereby prolonging the downward pressure
on the wealth of current homeowners and the resultant drag on the economy at
large.
This memo is notablefor several reasons. First, it's important to remember that when the Fedspeaks, it does so in sober, limited terms. So an unprompted Fed warningsuggesting "a persistent excess of supply" and a "resultant drag on theeconomy" is comparable to the Secretary of Homeland Security holding a pressconference to warn of the risk of an imminent national emergency. Second, anunprompted memo from Bernanke to the House means that he is so deeply worried hefelt the need to speak out in as strong a voice as his position permits. Third,the Fed rarely speaks on issues unrelated to its direct activities. Indeed,
Finally, a further indicator of the depth of the Fed'sconcerns is what may be an apparently unprecedented set of
There are a multitude of additional indicators that our current treatmentof the housing sector will at minimum prevent an economic recovery and at worsthave disastrous consequences for the stability of the financial sector as wellas the health of the middle class. (For the record, my analysis leans towardthe latter of these two viewpoints.) These include the reportedly poor healthof our financial institutions (zombie banks),the administration's seeming efforts to cover this fact up, and the inevitable failure of federal homeowner assistance programs that rely on the cooperation of financial institutions whose profit incentives are in the reverse direction.
Consumer spending represents 70 percent of the nation'seconomy and is central to any economic recovery. To achieve sufficient
The report
Moreover, the fear of a continuing loss of wealth (which isa cushion against job loss or other economic emergencies), the fear of job lossitself, the negative effects of underwater homes, lack of forbearance forunemployment (a point the Fed particularly emphasizes), and consumersstruggling to meet mortgage payments in a far more difficult environment areall dragging the economy down.
There is also a far worse possibility. Today, an estimated
First, many homeowners would be so farunderwater that massive walkaways would be likely. The negative impact onconsumer spending of such price declines would almost certainly lead to a viciouscycle of more job losses, leading to further walkaways by struggling consumers.
Second, the mortgage securities market would be in chaos.Nonperforming loans would lead to the forced recognition that bank capital (basedon the value of mortgages in bank portfolios) is weak or insufficient.
Third, it is almost impossible to imagine foreclosures onthe massive scale anticipated without dire social consequences or even someform of social unrest. As Peggy Noonan has observed, the real meaning of OccupyWall Street is that this is just the
What is shocking is the almost total lack of attention the administrationhas paid to suffering homeowners. It's hard for me (and apparently ChairmanBernanke) to understand how the administration can possibly hope to revitalizethe economy without seriously addressing the overhang of consumer housing debt.Moreover, the failure to address the risk this poses for a broader economiccatastrophe borders on the inexcusable.
If President Obama is serious about saving the middle classand reducing income inequality, the administration needs to be far more aggressive in developing policies to keep homeowners as homeowners. As I have written before,this was one of FDR'scentral goals in the New Deal. Detailed proposals for addressing thisextraordinary risk doexist. However, they will require a determined effort. There are solutions,but they are not simple.
What is most important right now is that we recognize we arein a lifeboat that will not reach land. We need to focus on implementing ameaningful solution to the problem. A clock is ticking and Washington needs toacknowledge that a witching hour is approaching.
This post originally appeared as part of the Restoring Capitalism series at the New Deal 2.0 blog, a project of the Roosevelt Institute.