THE BLOG
09/02/2011 01:43 pm ET | Updated Nov 02, 2011

Obama's Job Creation Failure: He Did Not Fix Housing

In the conventional wisdom, there is nothing President Obama can do to put Americans back to work in large numbers. He is a president supposedly held hostage by vengeful politics, holed up in a White House surrounded by lunatics and impotent hacks, with congressional combat rendering meaningful action impossible.

Nonsense. There is one thing the president can do right now, and largely by himself, if he finds the courage to command people working under him -- not least Treasury Secretary Timothy Geithner: He can help fix the distress in the housing market, which was the immediate trigger for the Great Recession, and which continues to play a major in preventing recovery.

The president can force mortgage companies to aggressively provide relief to homeowners who owe the bank more than their homes are worth, writing down principal balances. He can direct the Treasury, which supervises the administration's mortgage relief programs, to begin wielding serious sanctions against major lenders whose strategic incompetence and opportunistic intransigence have prevented meaningful numbers of troubled mortgages from being modified, keeping millions of homeowners stuck in foreclosure limbo.

The banks have succeeded in delaying and profiteering, collecting fees they levy for appraisals, insurance policies and other services, funneling this business through their own subsidiaries. Foreclosure, it turns out, is a profitable enterprise for many lenders. The Treasury could make it painful, altering the incentives at play for mortgage companies.

The president can also invigorate a now tiny program that is supposed to help people who are current on their mortgages refinance into lower interest rate loans. There, too, lenders have obstinately refused to deliver, keeping the country locked in a fitful economic purgatory.

If Obama did all of these things, he would put tens of billions of dollars in the pockets of struggling people, and he would create greater certainty in the marketplace. He would limit the overload of foreclosed homes piling up in the housing market, putting continued drag on housing prices. He could spur people now foregoing maintenance on their homes in anticipation of losing them to instead spend money to fix up their residences, generating demand for goods and services along with its happy offspring: jobs.

The president could do all of these things without having to negotiate with John Boehner, Eric Cantor, Mitch McConnell, or any of the other Republicans who are indeed doing their best to constrain effective policy in a cynical bet that a bad economy is a good electoral strategy for their party.

Would a muscular approach to housing by itself reinvigorate the economy? Hardly. Would it make a meaningful difference? Without question.

"It would be a great stimulus to the economy if a lot more people were making lower monthly payments on their mortgages," said Jared Bernstein, a former chief economic adviser to Vice President Biden and now a senior fellow at the Center on Budget and Policy Priorities, adding that significant relief could spell "potentially hundreds of thousands of jobs."

That estimate, it must be noted, is more than the zero net jobs that were added to the economy in August, according to the Labor Department.

Why has the Obama administration accomplished so little on the housing front, the one area where it has a clean shot at the policy dials? Essentially, because Geithner lives in a world in which all policy prescriptions begin with the assumption that giant banks must be kept happy or else economic damage will result, and he has the president's ear.

Geithner has calculated that broad homeowner relief would stick large mortgage lenders with potentially big losses on their second mortgages -- that is, the home equity lines of credit that once facilitated so much spending in the economy. This seems understandable, given that Geithner was a key architect of the financial system bailouts crafted in 2008 that did indeed stave off a potential implosion. When you have helped put out a raging inferno, you are naturally reluctant to add to the fire risk down the road.

But the biggest impediment to meaningful action has been a ceaseless argument over how to manage so-called moral hazard: Geithner and other opponents of forcing banks to write down principal balances have asserted that doing so would reward people who used their homes as ATM machines, encouraging further recklessness in future eras.

We need to get past this crippling and ultimately irrelevant argument, and accept that any bailout is likely to be messy, with the deserving and undeserving winding up lumped together. What we are doing now is the equivalent of refusing to use the fire extinguisher in the face of flames because we are worried about messing up the place with the resulting foam.

As head of the New York Fed during the Bush administration, where he helped engineer the rescues for banks teetering toward collapse, Geithner and Bush's Treasury Secretary Hank Paulson did not let moral hazard interfere with their swift, unqualified rescue campaign, in which they amassed $700 billion for Wall Street's succor.

The argument then was that the entire financial system was at risk, and there was no time to sort out the good guys from the bad. This is how AIG, whose reckless derivatives trading would have made a Gold Rush swindler blush, got rescued along with Bank of America, because the alternative was unthinkable: a rippling disaster that could bring down other mega-institutions. The one time the authorities got selective and moralistic, allowing Lehman Brothers to collapse, the result was a contagious fear that spread around the world, delivering a global recession.

In short, rescues were made indiscriminately because the institutions involved were deemed too big to fail. That label must surely apply to the six million Americans who have been out of work for six months or longer. Isn't their fate more important than the abstract principle of not rewarding people who took foolish risks? Preventing these people from sliding into a hole from which many will never escape requires immediate action, and the quickest way there is through housing.

The moral hazard dimension is overblown anyway. Yes, plenty of people tapped their home equity to add flat-screen televisions to their living rooms and take their children to Disney World, and the thought of bailing them out is unappetizing. But plenty of people placed in this camp are themselves partially victims of their era: They tapped exotically lenient mortgages because their incomes were effectively shrunken by the inflating prices of housing that resulted from the actions of others -- people who availed themselves of easy credit, adding demand to the housing market.

If you were fortunate enough to buy a nice house in a hot market like San Diego or Phoenix in the mid-1990s and you simply stayed there, it may be easy to pass judgement on those who bought in the years following. Many signed off on terrible mortgages with low teaser interest rates that soon reset higher. But if you happened to get married and have children in one of those same markets in 2005 or 2006 and you wanted to put your kids in a good school district, there was a decent chance that you could not afford to do that without resorting to a funny-money mortgage -- precisely because others before you gambled on real estate and drove up prices.

Saying that people should of known better may feel morally correct, but there is ambiguity here. In a bubble, prices are imposed on everyone, even those not playing. When money starts flowing in your town, it brings change, whether you have money or not.

And let us not forget that real estate speculation was enabled -- indeed, encouraged -- by regulators who should have addressed problems. Alan Greenspan, the Federal Reserve chairman, kept interest rates low, making mortgages cheap, and he ignored problems in the lending world, letting bogus appraisals and lenient underwriting standards become the norm. A pair of Clinton administration Treasury secretaries, Bob Rubin and Larry Summers, joined with Greenspan to deregulate derivatives, enabling money to course more freely than ever through the financial system. The Clinton and Bush administrations encouraged Fannie Mae and Freddie Mac, the two government-backed mortgage companies, to guarantee growing volumes of mortgages, making money readily available to every stripe of con artist and charlatan, along with the corner mortgage broker.

Yes, a lot of ordinary people made a lot of stupid decisions, but a lot of smart and powerful people facilitated that outcome through regulatory abdication and ideological fervor.

When a few people wind up upside down on their houses, it is an unfortunate event that can be explained away with blame. When one-third of all homeowners are underwater, this is a systemic failure, one that needs to be addressed -- not just for the sake of homeowners, but for the sake of the broader economy.

On Friday, the Labor Department affirmed that this economy is sick and getting sicker. People who have never owned homes, who never had the option to refinance to fill their bedrooms with clothes, are nonetheless paying for the sins of others through long-term joblessness.

Obama can wring his hands over the state of political dysfunction with a good deal of merit, he can validly blame the Republicans for monkey-wrenching the economy, but this will solve nothing. Rather, he should be focusing on the areas under his direct authority, and that starts with housing.