The housing market of the 2000s "was the Wild West, and there was no sheriff in town. ... The only difference is that in the old days, people robbed the banks. Now the banks were robbing the people."
--JIM ROKAKIS, then-Cuyahoga County Treasurer, quoted in "Mortgages and Madness," Newsweek, May 24, 2008
There were few people in the country who saw into the pathology of the Wall-Street-engendered housing mania as deeply and as early as Jim Rokakis, whom I quoted in that article back in 2008 and whose ideas heavily informed my book Capital Offense. Not surprisingly (at least to me), Rokakis is also one of those on the front lines of a solution, as profiled on "60 Minutes" last Sunday. Knowing that the housing implosion was not natural market condition--and that therefore it couldn't be expected to "clear" like a normal market either (an insight that still eludes the Obama administration)--Rokakis has pushed for years for a "land bank" program that will demolish run-down homes left over from the bubble collapse that even the banks don't want any more, so that blighted neighborhoods can recover. Now he's finally got it...
Rokakis, the county treasurer, was puzzled in the early 2000s when he saw real-estate values soaring in "the mistake by the Lake," as Cleveland was sometimes known. Rokakis knew the rust-belt market had always been stagnant; what was different now? So he was able to see, long before most, that it was all driven by Wall Street; that unethical mortgage brokers were being encouraged by securitization-hungry Wall Street firms to loan almost any amount to anybody, even in places once bypassed by the real-estate market. The finance community in New York knew that, in an ever-appreciating real estate market nationwide, even indigent mortgage holders could always refinance, even in backwaters like Cleveland. And Wall Street, of course, would then snap up the //next round// of loans as well and bundle them into yet a new round of securities. This no longer had anything to do with real-estate values in Cleveland or any kind of a normal market, Rokakis realized. Deeply worried, Rokakis attempted to awaken the interest of the Fed and other regulatory authorities to the emerging bubble, and the inner dynamics that were driving it. The authorities, of course, had no interest in what this hayseed from the heartland had to say, as was typical in those years. The result: the greatest crash since the Great Depression, and a Wall Street that to this day has escaped whipping.
For those who are heartened by the upturn in national housing numbers announced today, take heed. Unless interventionist programs like Rokakis's are created on a national scale, and Washington gets much tougher with the banks (forcing them to do what it should have three years ago, which is to launch a program of writing down principal as well as interest), we will still be writing stories and blog posts about the underwater mortgage market and an ass-dragging economy a few years from now. As the MSNBC story above notes: "There are multiple, strong headwinds that will hold back [housing] recovery. The biggest is the long pipeline of housing foreclosures glutting the market with houses owned by banks looking to unload them at bargain prices."
Rokakis, as always, has the most sensible (and thus least heeded) advice: "You`re going to have to write down principal balances. Because if you don`t write down the principle to something that`s more realistic, it just guarantees that more people will walk away and more people will default." But nothing like this, or salvage programs like Cleveland's, can possibly occur without aggressive government intervention that does not appear forthcoming.
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