Timothy Geithner Forecloses on the Moratorium Debate

By refusing to halt foreclosures to sort out the mortgage mess, the treasury secretary again shows his favour to Wall Street

Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse.
This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks, congress could have given the money – but with the sort of conditions that would ensure the financial sector would never be the same. Alternatively, it could have allowed the collapse, and then rushed in with the liquidity to bring the financial system back to life.
But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible.
Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.
For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.
The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialise in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.
In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage – or who, in one case, did not even have a mortgage – have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases, foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.
A moratorium would give regulators the time needed to review servicers' processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic as the Obama administration used when it imposed a moratorium on deepsea drilling following the BP oil spill.
No one can seriously dispute that there is a real problem. Three of the largest servicers, Bank of America, JP Morgan and Ally Financial have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or "trust the banks".
If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner's disaster fairytale. If there were a moratorium in place for two to four months, then banks would stop adding to their inventory of foreclosed properties.
But most banks already have a huge inventory of unsold properties. Presumably, they would just sell homes out of this inventory. This "shadow inventory" of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.
Of course, it actually was Obama administration policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its Hamp programme, the idea being that this would give the housing market more time to settle down. Now, we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.
It doesn't make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner's positions throughout this crisis.
Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I'm just saying.

Dean Baker is co-director of the Center for Economic and Policy Research

Tuesday, June 1, 2010

Why Should We Listen to Deficit Hawks?

Cover via Amazon

Published on Tuesday, June 1, 2010 by The Guardian/UK
Why Should We Listen to Deficit Hawks?
Calls to cut social security come from economists who want to line Wall Street pockets with money from ordinary workers

by Dean Baker
When politicians demand that the public do something because of the dictates of financial markets, it is best to hold on to your wallet. Back in September of 2008, both President Bush and the Democratic leadership in Congress insisted that if we did not immediately hand over $700bn to the banks, the whole financial system would grind to a halt.

The threat worked – the banks got their $700bn from Congress and much more from the Fed – with few questions asked. As a result, Goldman Sachs, Citigroup, and the rest are now as profitable as ever and once again paying out record bonuses to "top performers".

If the market had been allowed to run its course Goldman, Citigroup, Morgan Stanley, and many other major banks would have been bankrupt, leaving their shareholders and creditors out of luck and their top executives walking the unemployment lines. There are reasons that this outcome would have been undesirable for the economy as a whole, but there is a big difference between the Tarp blank check and doing nothing. If the politicians and their accomplices in the economics profession had not overwhelmed the public with fear, we could have ensured that the bankers suffered from the crisis that they had themselves created.

With the banks back on their feet, the Wall Street crew and their accomplices in the economics profession are again feeling their oats. They are insisting that we have to put our hopes for economic recovery on the back burner. Instead, we have to focus on deficit reduction. The reason is that we have to soothe financial markets.

The claim is that if we don't act aggressively now to reduce the budget deficit then the "bond vigilantes" will start a run on US debt just as they have recently done with Greece. This is supposed to make us so scared that we will accept large cuts in social security and in other important programmes.

There are three basic problems with this argument. First, why on earth should anyone trust what the bankers' economist accomplices are telling us? These people completely missed the $8tn housing bubble; is there any reason to believe that their insight into financial markets is better today than it was two years ago?

The second reason not to follow their advice is that the financial markets themselves don't necessarily reflect the underlying reality in the economy. Are we supposed to twist ourselves into knots over whatever is fashionable in financial markets this week? Suppose we structure our policies to make the markets happy this week and then next week the Wall Street diz brains decide that something else is now fashionable? This leaves us forever chasing Wall Street fashions. That is not a sound basis for economic policy.

The third reason not to take the deficit hawks argument seriously is simply that it is bad economics. The country needs deficit spending to sustain demand until private demand recovers from the collapse of the housing bubble. This is basic logic – and the prestigious positions of many of the deficit hawks will not allow them to repeal the rules of logic.

Furthermore, the United States is not Greece, as all serious people know. It has a huge economy that is still largely self-sufficient (imports are only 16% of GDP). The idea that the United States is about to experience a run on its debt is absurd on its face. The Fed can and should buy the debt, if necessary. Let's hear the deficit hawks say this will cause inflation. With very few exceptions, they won't dare make such an assertion because they know it is not true.

The deficit hawks are not concerned about national insolvency; they are not worried about soaring inflation; they are worried about how to take every last penny from ordinary workers and give it to the Wall Street crew. That is what the Tarp was about and this is what the latest crusade to reduce the deficit is all about. Now they want to go after workers' social security because, as Federal Reserve Board chairman Ben Bernanke said: "That is where the money is." The fact that workers have paid for these benefits doesn't matter at all to the Wall Street crew.

So, if you feel like giving all your money to the Wall Street gang, then you should take the deficit hawks seriously. But, if you think that people who are not Wall Street millionaires have rights too, then get out the pitchforks and send the deficit hawks and their economist accomplices running.
© Guardian News and Media Limited 2010

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer ( www.conservativenannystate.org) and the more recently published Plunder and Blunder: The Rise and Fall of The Bubble Economy. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

Local Bias

Tuesday, October 19, 2010