(picture credit: http://www.moonbattery.com/Underwater-House.jpg)
As we await the outcome of the tea-party-dominated vote in Iowa--a tea party movement that got its name from Rick Santelli's rant on CNBC against Washington's "subsidizing losers' mortgages" in 2009 --let's take stock. More than two years in, this must be considered one of the most lopsided and pathological recoveries--a non-recovery, really--in American history. Here is what does not add up in our economy: even today, no one wants to risk the "moral hazard" of helping the "losers" -- the deadbeat mortgage holders who aroused the ire of the libertarian Santelli -- in a big way, lest this action undermine the proper working of capitalism. And yet we've just spent the last four years pouring hundreds of billions of dollars into helping deadbeat banks (while asking nothing in return), thus also undermining capitalism.
Why aren't we talking about the inequity in this? The "losers' mortgages," of course, continue to be the biggest dead weight on American recovery. The underwater mortgage and foreclosure crisis has prevented a resurgence of demand in a consumer economy that, because of stagnant wages, had become dependent on debt and refinancing for growth until the crash. So it is an economy that now has no great new life in it, with so many households still drowning in the deluge left behind by an unnatural-- this had little to do with authentic capitalism, Mr. Santelli! -- and fraud-driven housing mania, as I wrote in a post on Dec. 20.
On the other hand, the banks are soaring, artificially sustained by Ben Bernanke's Fed. This positive trend has been ironically turbocharged by the eurocrisis, with European banks dumping assets to be picked over by their U.S. brethren. Yet the American banks continue to defy even the meager government efforts to force them to renegotiate more underwater mortgages. From the very beginning, says Diane Thompson of the National Consumer Law Center, the admininstration and the Congress "underestimated the amount of fraud. And I think they overestimated the good will of the bankers. From the beginning, all the proposals were too small." Congress kicked its biggest opportunity away in 2009 by declining to alter bankruptcy rules and thus make it easier for homeowners to get out of bad mortgages, and the Obama administration didn't fight the issue very hard.
Maybe the strangest thing of all is that Barack Obama's 2012 re-election probably hinges on working this dead weight off the economy. And yet, with just 11 months to go, he remains curiously detached from the problem, still deferring to Timmy Geithner, his let-the-banks-be Treasury Secretary, who never met a Wall Street firm he didn't want to protect.
No one seems interested in discussing how nonsensical it is to be worrying about moral hazard for people but not for banks. (When was the last time you heard a good debate about the "too-big-to-fail" problem?) And even here the problem of forgiving "deadbeat" borrowers was always exaggerated, argues Kathleen Engel of Suffolk University, one of the most prescient observers of predatory lending and fraud in the country. As she points out, "The people who are walking away from their homes are generally investor-owners, not owner occupiers. Yeah, there's some reason to be concerned about moral hazard, but they still can be sued for deficiency judgements if they walk away."
Even the Justice Department, the SEC and other agencies have been passive, despite the evidence of massive documentation fraud in which the biggest banks were complicit. The one agency that could make a difference, the new and independent Consumer Finance Protection Bureau, remains hamstrung and leaderless because of GOP obstructionism.
No one in power wants to pressure Fannie and Freddie -- which have become too toxic to touch, again because of politics -- to renegotiate terms and write down principle. Currently, notes Thompson, "Fannie Mae and Freddie Mac don't even //allow// principle reductions." And Congress continues to hold up Dodd-Frank reform, including new mortgage rules.
This is what really ails us. It is the sclerosis eating at the heart of our economy. The only solution for a government-created crisis--yes, it is that, though not the way the tea partiers think--is a government-created solution. Naturally, you won't hear much of it discussed in Iowa over the weekend....
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