A lot of important stuff is cooking here at the end of the year. The headline battles about the tax cut deal and the deficit commission are very big deals, with short and long term implications both policy-wise and politically. You have probably seen enough writing about these headline grabbers (including from me) to keep you awake -- or put you to sleep -- well through the holiday season. But what is going on behind the curtain, away from the headlines, in the fight over banking policy and foreclosure fraud is just as important, and in some ways even more so. The budget deal expires in two years, some of the provisions (including the best one, unemployment extension) even sooner. The deficit commission report was a big moment in an important debate, but between partisan warfare, unpopular policy proposals, and short attention spans, most of what's in there isn't likely to be acted any time soon. But what happens in terms of the foreclosure fraud issue and the fight over banking regulations over the next year will determine whether we have a chance at escaping a Japanese style lost decade. I believe it will have more to do with whether the economy starts to revive than whatever mostly inefficient stimulus this tax cut provides, and I think it will have a bigger impact on whether Obama is re-elected than the tax cut deal or any other big issue coming up any time soon.
What crashed our economy was the speculative, out of control concentration of market power on Wall Street. That is what caused the housing bubble and subsequent housing price collapse, and until the massive underlying damage to our entire economy caused by that collapse begin to get healed, this economy will not get a whole lot better. With 25% of mortgages underwater, and more mortgages and household financial situations than that threatened by a weakened and unstable housing market, working and middle class consumers are not going to be going on any spending sprees any time soon.
The stimulus in the Obama-McConnell-Boehner tax cut deal, in spite of being bigger than the last stimulus, won't stimulate much except the excitement of inside the beltway pundits. The millionaires getting an extra $80,000 plus will buy a few more expensive meals and bottles of wine in expensive restaurants and maybe splurge on some new luxury items, but mostly they will save that money, investing it in safe bond deals while they wait for the economy to recover -- because as corporations have shown the last two years, you can be awash in cash but still not invest it in making new products if you don't think there is anyone out there buying. Middle class folks will tend to spend any extra dollars they have more on lowering their debt and adding to their savings, because with their biggest financial asset -- their home -- worth nearly as much as they thought it would be a few years, they know they have to shore up their financial position. The only folks actually spending more as a result of this deal are the unemployed and poor, simply because they have no choice -- they will be using the money to buy groceries and pay utilities and rent.
There is one other problem with this stimulus, and this is one the macroeconomists aren't getting: the vast majority of this money is going to preserve the status quo. It is stimulus in the sense that it is a lot of government money, unpaid for by any other budget cuts or long term tax hikes, but in terms of how real people will feel it, it is the status quo. People currently getting unemployment comp and various tax credits -- EITC, etc -- will still be getting them. People's tax rates will stay the same, because this is simply an extension of the tax cuts that have been in existence now for 10 years. To the vast majority of Americans -- still hard pressed, still squeezed by higher costs in necessities, still with a lower value home, still worried about their or their family members' jobs- there will be no boost in their take home pay or earnings potential, no new jobs actually being directly created like in the last stimulus bill. I am sure that many folks are happy to hear their taxes won't be going up, but they will have no extra money to buy no new things and no extra confidence that the economy will suddenly get better.
Which brings me back to banking and housing policy. This kind of ineffective weak tea stimulus is the only kind Republicans will be giving Obama in the next two years. But there are ways to significantly boost the economy right now that, between the Obama administration and the state Attorneys General negotiations with the big banks, can actually be done: write tight regulations around the financial reform bill, especially when it comes to issues like the swipe fees that directly pit the Wall St. bankers against main street business; have the DOJ prosecute bankers for using their market power to distort and harm the economy; and especially right now, force the bankers to write down mortgages. If the banks wrote down the mortgages of 5,000,000 underwater homeowners to the level the house was now worth in the market, so that they could stay in their homes and stabilize their financial condition, two very important things would happen economically. The first is that the housing market would finally begin to stabilize and recover- neighborhoods would no longer be riddled with abandoned homes and unkempt properties. The second is that all those homeowners, their debt reduced and their long term finances stabilized, might actually start spending money again: the multiplier effect would be big. Wall St will go into high pitched whining mode, but according to numbers one economist showed me, the profits that doing this would cost the banks would only amount to half the bonus money they paid out the last couple of years. The banks will scream bloody murder, but they will be just fine if we force them to write down these mortgages.
This is also actually the right thing, the moral thing, to do. The big banks on Wall Street destroyed this economy, and made out like bandits in the process. It should now be up to them to have to sacrifice to make things right again. But -- with all other possibilities of big boosts to the economy walled off by Congress -- this is also the only policy option the administration and the state AGs have to help get us through the bad times from this damaged economy.
Here's the other thing this does: it changes the political dynamics completely. It would show more clearly than any other thing the President could do that the Obama administration is on the side of hard-pressed middle class homeowners. And because the bankers will be squealing to high heaven, and their Republican friends on the hill taking up their cause, it will be obvious who is on what side. Pushing the banks hard to write down these mortgages is the best thing the administration could possibly do economically, morally, and politically.
The administration as a whole, which includes a lot of different components, does not yet see this. I think Elizabeth Warren gets this, and from what I am told some of the lawyers at DOJ get it and are chomping at the bit to exert legal pressure on the banks. Some of the political staffers I talk with are starting to see this dynamic as well. However, Treasury certainly doesn't seem inclined in this direction, and certain agencies especially the Office of the Comptroller of the Currency are completely in the tank for the bankers. One state AG told me that the "OCC has the attitude that the banks are perfect", and are resisting the AG's investigations and negotiations in every way they can.
I don't know what will happen with the administration. I am hopeful that it will sink in soon that the economy isn't going to get better very quickly, and that the political team will realize that taking on the big banks on behalf of hard pressed homeowners is a political winner. But no matter what the administration does, I do hold some hope for the state AGs as they negotiate with the banks. They are led by Tom Miller, an old friend of mine from Iowa and one of the most honest and pro-consumer politicians I know. Tom is meeting today with community activists from around the country, and I know that his heart is with them. Whatever the Obama administration is doing, I have hopes the AGs can put enough pressure on the banks to move this in the right direction.
If we can finally start getting to the heart of the problem -- the bankers and irresponsible system they created -- we can finally start rebuilding this economy. That will be a fight, a big one because no politician likes taking on these banks. But that kind of fight might actually start moving our politics in a better direction as well.
Cross-posted at my home blog, OpenLeft, where you can find all of my writing on Wall Street, the economic crisis, and U.S. politics in general.
If I could pick one idea to purge from the American psyche, it would be the idea that rich people are special, magical wealth leprechauns who must be allowed to pursue their interests without hindrance lest the entire economy collapse. The reason this elitist Randroid idea is particularly noxious is because it results in things like this being taken seriously:
If mark-to-market accounting is to blame for the current financial crisis, then the National Weather Service is to blame for Hurricane Katrina; if it hadn’t told us the hurricane hit New Orleans, the city would never have flooded.
This is the logic the bankers are using, and they are getting sympathetic ears in Congress. The bankers have gotten two members of Congress to introduce a bill to establish a new body that could suspend accounting rules for financial institutions.
Edward L. Yingling, the president of the American Bankers Association, says the proposal addresses “systemic risks that accounting standards can have on the economy.”
Steve Forbes, the publisher and erstwhile presidential candidate, goes even further. “Mark-to-market accounting is the principal reason why our financial system is in a meltdown,” he wrote in a Wall Street Journal op-ed piece.
They say the problem, in short, is not that the banks acted irresponsibly in creating financial instruments that blew up, or in making loans that could never be repaid. It is that someone is forcing them to fess up. If only the banks could pretend the assets were valuable, then the system would be safe.
Mark-to-market accounting isn't a perfect way to keep books -- in bubble times, for instance, it makes financial institutions look much financially stronger than they really are -- but it beats what Forbes wants, which is the right to just make crap up. Lookit:
But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.
Ah, if only Milo Mindderbinder had thought of this when he was going bust from investing in all that chocolate-covered cotton! Instead of panicking and trying to unload it at bargain prices, he could have simply insisted that it was worth precisely what he'd originally paid for it and then the Syndicate would still be up and running!
In all seriousness: Forbes' argument is basically the same as the warblogger argument we heard back in 2004, namely that the Iraq war was going super-duper well but that Bush wasn't getting credit for it because the wicked hippies weren't clapping loudly enough. He's basically saying that banks should have a right to create whatever bulls*** securities they want and price them however they want without ever having to account for whether they're really worth anything. If you let them do this then pretty soon banks will be reporting record profits from their investments in magic beans. That doesn't strike me as a very wise idea.
Other news:
- D-Day reports that the Cuyahoga County Court actually believes in enforcing the rule of law and isn't allowing lenders to use forged documents in foreclosure cases. He comments:
Basically it makes it nearly impossible to do anything but use verifiable documents and signatures, without risking sanctions and the dismissal of the foreclosure case.
As 4closure fraud, which first noticed the affidavit policy of the court, said, “This is all we ever asked for, the rule of law, that is already in place, be followed.”
Courts are slowly but gradually codifying policies that put much greater burden on mortgage lenders and their counsels to actually follow the law. We’ve seen in recent years that the banks cannot be expected to do that. So something’s gotta give.
Indeed it does. But for now let's bask in a brief instance where major financial institutions are being forced to comply with the law. It's sadly a rare occurrence these days.
- On the other hand, this is highly discouraging (my emphasis):
The five largest loan servicers, including Bank of America Corp. and JPMorgan Chase & Co., may be the first to settle with the 50 state attorneys general probing foreclosure practices, Iowa Attorney General Tom Miller said. [...]
The probe has since widened to include other mortgage practices, with attorneys general suggesting a potential resolution should include improving the loan modification process, barring foreclosures when people are modifying loans and creating a general fund to compensate homeowners who may have been victims of wrongful foreclosures. [...]
The group isn’t pursuing a criminal investigation, Miller said. “Our focus is to reform the servicing process and that’s inherently civil, not criminal,” he said.
I have a real problem with this. One of the more astounding aspects of modern America is how often major financial institutions are busted for overtly criminal activity and how rarely any of them ever go to jail for it. Instead they pony up some "Oopsie!" cash, admit to no wrongdoing and call it a day. I may be old-fashioned but I'd really like to imprison the people who forged foreclosure documents, who committed perjury in foreclosure affidavits and who needlessly caused God-knows-how-many people senseless grief and agony.
- You get three extra days to file your taxes, you lucky duckies! Be sure to enjoy your recently-renewed income tax cut, as well as your soon-to-be-implemented payroll tax cut. Socialism sure is cheap nowadays, donchathink?
- And finally, here's an interesting piece on Goldman's recent investment in Facebook (or is that Squidbook now?). The piece basically asks whether Facebook can issue shares as it plans to do without having to go public. I'm no expert but if Facebook wanted to find a firm that could help them arrange a legally questionable equity issuance, they probably picked the right one.
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