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By pocket-vetoing the bill that sailed through Congress to expedite mortgage foreclosures, President Obama may have begun a chain reaction that will blow up Treasury Secretary Tim Geithner's confidence game with the banks. Let me explain.
In early 2009, Obama and his top economic aides faced a fateful
choice: either do an honest accounting of the nation's big insolvent
banks, like Citigroup; or keep propping them up and collude with the
banks in camouflaging just how bad things were -- and still are.
They opted for camouflage. Geithner and the Federal Reserve devised a
"stress test" exercise that avoided an honest accounting of the junk on
the banks' balance sheets; instead they used economic models based on
very rosy assumptions about how bad the recession would be. Citi and the
others were pronounced basically healthy.
This move avoided the kind of reckoning that would break up (and
clean up) the big banks. Instead, the camouflage policy allowed the big
banks to very slowly rebuild their balance sheets with speculative
profit centers, relying first on TARP money and then on zero interest
rate advances from the Federal Reserve.
But there was a huge downside for the economy. The banks reverted to
the same kind of speculative plays that crashed the system; they also
continued gouging consumers. And thanks to the Federal Reserve, the
banks could make very easy money borrowing from the Fed at almost zero
interest rates and investing the money in government guaranteed Treasury
securities.
By 2010, the banks were again making large profits and paying huge
bonuses -- as if the financial collapse had never occurred. What they
did not, however, do was make very many loans to small and medium sized
businesses or hard pressed consumers.
Meanwhile, regional and community banks, which do make loans to
business, have been hard hit by the collapse in commercial real estate
prices, and have tightened terms for ordinary business borrowers. So all
but the largest businesses, which can access the bond market directly,
are starved for credit.
Thanks to Geithner's permissive accounting standards, the big banks
have also been allowed to carry on their books at full value securities
based on underwater mortgage loans -- securities that are really worth
between 30 and 70 cents on the dollar. If the banks had to honestly
account for their depressed market value, the banks' balance sheets
would look even worse.
This is an exact repetition of what befell Japan in the 1990s -- a lost decade
of economic growth caused by a financial collapse and the collusion of
the government with the banks to pretend that all was rosy. Indeed, the
US economy today is in far worse shape than Japan was, because all
during that period Japan continued to be a major export power while the
US today runs a huge trade deficit.
But Obama's veto of the foreclosure-streamlining bill calls the
question on Geithner. We are now learning that a lot of the securities
were not properly documented, which makes them worth even less.
If the foreclosure machinery is suddenly gummed up because the
President has ruled out a quick fix that favors bankers, the banks may
be forced to recognize what the junk on their balance sheets is really
worth (not much). And the whole game of pretending that all is fine with
the banks is in jeopardy.
The fact is that a vast number of mortgages that we turned into
mortgage backed securities are legally flawed. This calls into further
question the value of massive portfolios held by banks -- and forces
some kind of reckoning.
For aficionados who want more detail, Mike Konczal has provided a very useful idiots' guide to the next great unraveling.
Obama's veto also pulls the rug out from under the pretense that the
Administration's mortgage relief program is working. For nearly two
years, the Treasury and the Department of Housing and Urban Development
have sponsored a mortgage modification program known as HAMP (Home
Affordable Modification Program).
This program is voluntary to the banks, who get a few thousand
dollars in incentive payments from the government in exchange for
reducing monthly payments. But the relief is usually shallow and
something like half of borrowers who do get modifications go back into
default. Fewer than 500,000 have gotten modifications out of several million at risk of foreclosure.
Most of the underwater homeowners, now almost one in three, are not
speculators or people who took out sub-prime loans. They are simply
ordinary Americans whose houses are suddenly worth less than the
mortgages on them, because of the general collapse in housing prices.
The lame HAMP
program, the joint creation of Treasury and HUD, is another part of
Geithner's grand design to disguise just how bad things are at the big
banks and prevent an honest accounting or a serious reckoning.
Meanwhile, housing prices are declining again, despite record low
mortgage interest rates (available only to blue chip borrowers), which
creates another serious drag on the economy. And the housing market
won't return to normal until the mortgage mess is resolved.
But the belated recognition that millions of mortgages are
inadequately documented could be a blessing in disguise. It could force
the administration to come up with stronger medicine both to clean up
the banks and to help distressed homeowners.
The Dodd-Frank Act (PDF)
gives the Treasury the tools to do an honest accounting of the big
banks, and shut down or break up zombie banks that are insolvent -- so
that successor banks can get on with the business of lending. With a
serious strategy for both the banks and the mortgage mess, we could
remove two of the main drags on the economy.
White House political chief David Axelrod, speaking on CBS's Face the Nation Sunday, tried to back-pedal from
the significance of Obama's action. (Heaven forbid that three weeks
before a crucial election Obama should sound like he is siding with
consumers against bankers.) Meanwhile, the indispensable Rep. Alan
Grayson of Florida called for a national moratorium on foreclosures.
Of the three prime architects of Obama's inadequate economic program,
two have now moved on -- economic policy czar Larry Summers and budget
chief Peter Orszag. It's time to for Geithner to join them, so that
Obama can get real about the banking and mortgage crisis.
The president's veto of the foreclosure bill shows that his Obama's
own instincts are better than his advisors'. It's a start. But if Obama
temporizes now, he faces a slow unraveling of the flimsy financial house
that Geithner built, and an even weaker economy.
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By pocket-vetoing the bill that sailed through Congress to expedite mortgage foreclosures, President Obama may have begun a chain reaction that will blow up Treasury Secretary Tim Geithner's confidence game with the banks. Let me explain.
In early 2009, Obama and his top economic aides faced a fateful
choice: either do an honest accounting of the nation's big insolvent
banks, like Citigroup; or keep propping them up and collude with the
banks in camouflaging just how bad things were -- and still are.
They opted for camouflage. Geithner and the Federal Reserve devised a
"stress test" exercise that avoided an honest accounting of the junk on
the banks' balance sheets; instead they used economic models based on
very rosy assumptions about how bad the recession would be. Citi and the
others were pronounced basically healthy.
This move avoided the kind of reckoning that would break up (and
clean up) the big banks. Instead, the camouflage policy allowed the big
banks to very slowly rebuild their balance sheets with speculative
profit centers, relying first on TARP money and then on zero interest
rate advances from the Federal Reserve.
But there was a huge downside for the economy. The banks reverted to
the same kind of speculative plays that crashed the system; they also
continued gouging consumers. And thanks to the Federal Reserve, the
banks could make very easy money borrowing from the Fed at almost zero
interest rates and investing the money in government guaranteed Treasury
securities.
By 2010, the banks were again making large profits and paying huge
bonuses -- as if the financial collapse had never occurred. What they
did not, however, do was make very many loans to small and medium sized
businesses or hard pressed consumers.
Meanwhile, regional and community banks, which do make loans to
business, have been hard hit by the collapse in commercial real estate
prices, and have tightened terms for ordinary business borrowers. So all
but the largest businesses, which can access the bond market directly,
are starved for credit.
Thanks to Geithner's permissive accounting standards, the big banks
have also been allowed to carry on their books at full value securities
based on underwater mortgage loans -- securities that are really worth
between 30 and 70 cents on the dollar. If the banks had to honestly
account for their depressed market value, the banks' balance sheets
would look even worse.
This is an exact repetition of what befell Japan in the 1990s -- a lost decade
of economic growth caused by a financial collapse and the collusion of
the government with the banks to pretend that all was rosy. Indeed, the
US economy today is in far worse shape than Japan was, because all
during that period Japan continued to be a major export power while the
US today runs a huge trade deficit.
But Obama's veto of the foreclosure-streamlining bill calls the
question on Geithner. We are now learning that a lot of the securities
were not properly documented, which makes them worth even less.
If the foreclosure machinery is suddenly gummed up because the
President has ruled out a quick fix that favors bankers, the banks may
be forced to recognize what the junk on their balance sheets is really
worth (not much). And the whole game of pretending that all is fine with
the banks is in jeopardy.
The fact is that a vast number of mortgages that we turned into
mortgage backed securities are legally flawed. This calls into further
question the value of massive portfolios held by banks -- and forces
some kind of reckoning.
For aficionados who want more detail, Mike Konczal has provided a very useful idiots' guide to the next great unraveling.
Obama's veto also pulls the rug out from under the pretense that the
Administration's mortgage relief program is working. For nearly two
years, the Treasury and the Department of Housing and Urban Development
have sponsored a mortgage modification program known as HAMP (Home
Affordable Modification Program).
This program is voluntary to the banks, who get a few thousand
dollars in incentive payments from the government in exchange for
reducing monthly payments. But the relief is usually shallow and
something like half of borrowers who do get modifications go back into
default. Fewer than 500,000 have gotten modifications out of several million at risk of foreclosure.
Most of the underwater homeowners, now almost one in three, are not
speculators or people who took out sub-prime loans. They are simply
ordinary Americans whose houses are suddenly worth less than the
mortgages on them, because of the general collapse in housing prices.
The lame HAMP
program, the joint creation of Treasury and HUD, is another part of
Geithner's grand design to disguise just how bad things are at the big
banks and prevent an honest accounting or a serious reckoning.
Meanwhile, housing prices are declining again, despite record low
mortgage interest rates (available only to blue chip borrowers), which
creates another serious drag on the economy. And the housing market
won't return to normal until the mortgage mess is resolved.
But the belated recognition that millions of mortgages are
inadequately documented could be a blessing in disguise. It could force
the administration to come up with stronger medicine both to clean up
the banks and to help distressed homeowners.
The Dodd-Frank Act (PDF)
gives the Treasury the tools to do an honest accounting of the big
banks, and shut down or break up zombie banks that are insolvent -- so
that successor banks can get on with the business of lending. With a
serious strategy for both the banks and the mortgage mess, we could
remove two of the main drags on the economy.
White House political chief David Axelrod, speaking on CBS's Face the Nation Sunday, tried to back-pedal from
the significance of Obama's action. (Heaven forbid that three weeks
before a crucial election Obama should sound like he is siding with
consumers against bankers.) Meanwhile, the indispensable Rep. Alan
Grayson of Florida called for a national moratorium on foreclosures.
Of the three prime architects of Obama's inadequate economic program,
two have now moved on -- economic policy czar Larry Summers and budget
chief Peter Orszag. It's time to for Geithner to join them, so that
Obama can get real about the banking and mortgage crisis.
The president's veto of the foreclosure bill shows that his Obama's
own instincts are better than his advisors'. It's a start. But if Obama
temporizes now, he faces a slow unraveling of the flimsy financial house
that Geithner built, and an even weaker economy.
By pocket-vetoing the bill that sailed through Congress to expedite mortgage foreclosures, President Obama may have begun a chain reaction that will blow up Treasury Secretary Tim Geithner's confidence game with the banks. Let me explain.
In early 2009, Obama and his top economic aides faced a fateful
choice: either do an honest accounting of the nation's big insolvent
banks, like Citigroup; or keep propping them up and collude with the
banks in camouflaging just how bad things were -- and still are.
They opted for camouflage. Geithner and the Federal Reserve devised a
"stress test" exercise that avoided an honest accounting of the junk on
the banks' balance sheets; instead they used economic models based on
very rosy assumptions about how bad the recession would be. Citi and the
others were pronounced basically healthy.
This move avoided the kind of reckoning that would break up (and
clean up) the big banks. Instead, the camouflage policy allowed the big
banks to very slowly rebuild their balance sheets with speculative
profit centers, relying first on TARP money and then on zero interest
rate advances from the Federal Reserve.
But there was a huge downside for the economy. The banks reverted to
the same kind of speculative plays that crashed the system; they also
continued gouging consumers. And thanks to the Federal Reserve, the
banks could make very easy money borrowing from the Fed at almost zero
interest rates and investing the money in government guaranteed Treasury
securities.
By 2010, the banks were again making large profits and paying huge
bonuses -- as if the financial collapse had never occurred. What they
did not, however, do was make very many loans to small and medium sized
businesses or hard pressed consumers.
Meanwhile, regional and community banks, which do make loans to
business, have been hard hit by the collapse in commercial real estate
prices, and have tightened terms for ordinary business borrowers. So all
but the largest businesses, which can access the bond market directly,
are starved for credit.
Thanks to Geithner's permissive accounting standards, the big banks
have also been allowed to carry on their books at full value securities
based on underwater mortgage loans -- securities that are really worth
between 30 and 70 cents on the dollar. If the banks had to honestly
account for their depressed market value, the banks' balance sheets
would look even worse.
This is an exact repetition of what befell Japan in the 1990s -- a lost decade
of economic growth caused by a financial collapse and the collusion of
the government with the banks to pretend that all was rosy. Indeed, the
US economy today is in far worse shape than Japan was, because all
during that period Japan continued to be a major export power while the
US today runs a huge trade deficit.
But Obama's veto of the foreclosure-streamlining bill calls the
question on Geithner. We are now learning that a lot of the securities
were not properly documented, which makes them worth even less.
If the foreclosure machinery is suddenly gummed up because the
President has ruled out a quick fix that favors bankers, the banks may
be forced to recognize what the junk on their balance sheets is really
worth (not much). And the whole game of pretending that all is fine with
the banks is in jeopardy.
The fact is that a vast number of mortgages that we turned into
mortgage backed securities are legally flawed. This calls into further
question the value of massive portfolios held by banks -- and forces
some kind of reckoning.
For aficionados who want more detail, Mike Konczal has provided a very useful idiots' guide to the next great unraveling.
Obama's veto also pulls the rug out from under the pretense that the
Administration's mortgage relief program is working. For nearly two
years, the Treasury and the Department of Housing and Urban Development
have sponsored a mortgage modification program known as HAMP (Home
Affordable Modification Program).
This program is voluntary to the banks, who get a few thousand
dollars in incentive payments from the government in exchange for
reducing monthly payments. But the relief is usually shallow and
something like half of borrowers who do get modifications go back into
default. Fewer than 500,000 have gotten modifications out of several million at risk of foreclosure.
Most of the underwater homeowners, now almost one in three, are not
speculators or people who took out sub-prime loans. They are simply
ordinary Americans whose houses are suddenly worth less than the
mortgages on them, because of the general collapse in housing prices.
The lame HAMP
program, the joint creation of Treasury and HUD, is another part of
Geithner's grand design to disguise just how bad things are at the big
banks and prevent an honest accounting or a serious reckoning.
Meanwhile, housing prices are declining again, despite record low
mortgage interest rates (available only to blue chip borrowers), which
creates another serious drag on the economy. And the housing market
won't return to normal until the mortgage mess is resolved.
But the belated recognition that millions of mortgages are
inadequately documented could be a blessing in disguise. It could force
the administration to come up with stronger medicine both to clean up
the banks and to help distressed homeowners.
The Dodd-Frank Act (PDF)
gives the Treasury the tools to do an honest accounting of the big
banks, and shut down or break up zombie banks that are insolvent -- so
that successor banks can get on with the business of lending. With a
serious strategy for both the banks and the mortgage mess, we could
remove two of the main drags on the economy.
White House political chief David Axelrod, speaking on CBS's Face the Nation Sunday, tried to back-pedal from
the significance of Obama's action. (Heaven forbid that three weeks
before a crucial election Obama should sound like he is siding with
consumers against bankers.) Meanwhile, the indispensable Rep. Alan
Grayson of Florida called for a national moratorium on foreclosures.
Of the three prime architects of Obama's inadequate economic program,
two have now moved on -- economic policy czar Larry Summers and budget
chief Peter Orszag. It's time to for Geithner to join them, so that
Obama can get real about the banking and mortgage crisis.
The president's veto of the foreclosure bill shows that his Obama's
own instincts are better than his advisors'. It's a start. But if Obama
temporizes now, he faces a slow unraveling of the flimsy financial house
that Geithner built, and an even weaker economy.