Larry Summers and Timothy Geithner are clearly not on the same page about that foreclosure crisis they inherited in 2009.
The two former Obama administration officials recently published contradictory accounts of their efforts to overcome the epidemic of home foreclosures that swept the nation. In response to a compelling new study by Atif Mian and Amir Sufi that concludes the government could have catalyzed broad economic benefits by adopting a more aggressive housing debt program, Summers said last week that everyone on the Obama team really wanted to do exactly that.
"We all believed in 2009 what Mian and Sufi have now conclusively demonstrated -- that reducing mortgage debt would spur consumer spending," Summers, the former director of the National Economic Council, wrote in the UK-based Financial Times. "And there was intense frustration with how few homeowners our programmes were reaching, to the point where I convened all the relevant officials from the Treasury, the Housing and Urban Development department and other agencies every month for two years to challenge them to find ways to accelerate the process and to make sure that they were considering all the various schemes academics and others were suggesting. So Mian and Sufi are not wrong in their dissatisfaction."
Which is very nice. It's also diametrically opposed to the detailed justification for inaction that former Treasury Secretary Geithner offered in his new book, Stress Test:
We did not believe, though we looked at this question over and over, that a much larger program focused directly on housing could have a material impact on the broader economy. Jan Eberly, the assistant secretary of economic policy, took a fresh look at these alternatives later, and her analysis concluded that even if the federal government had borrowed and spent $700 billion to wipe out every dollar of negative equity in the U.S. housing market -- a "principal reduction" program of utopian proportions -- it would have increased annual personal consumption by just 0.1 to 0.2 percent. The projected impact on employment was relatively modest, too, amounting to a cost of about $1.5 million of federal spending per job created. By contrast, our auto rescue had cost about $14,000 for each of the one million jobs it had saved. In other words, even if Congress had authorized the mother of all principal reduction programs, as expensive as TARP and almost as expensive as the Recovery Act, it wouldn't have changed the trajectory of the recovery.
"Negative equity" is what happens when borrowers owe more on their mortgage than their home is worth. It's widely viewed as the dominant driver of foreclosures, and it's a core focus of Mian and Sufi's book, House of Debt.
Summers explained in the Financial Times that while he wished that President Barack Obama's economic team had done more on housing, political considerations made it impractical. That account contradicts the line the administration gave to reporters and the public between 2009 and 2011 -- that boosting the broader economy was the best way to cure the housing market, not the other way around. Mian and Sufi's book is making waves in the economic profession for presenting robust empirical evidence that boosting the housing market would have had substantial benefits on the broader economy.
But however the numbers work out, Summers' account of the administration's thinking on housing is simply not compatible with Geithner's.
One of the political obstacles Summers discussed involves the failed effort to change the law to allow bankruptcy judges to discharge housing debt. He wrote that the administration ultimately decided not to back such a change because it would have been a waste of political capital. There was no way, he said, to get the Senate votes needed for passage.
That may or may not be true. But the political facts that Summers did not mention are at least as important as the political speculation he did. Both Summers and Obama had explicitly promised congressional Democrats that the administration would pursue bankruptcy reform and other foreclosure relief efforts. Their vows to pursue bankruptcy changes were issued in exchange for votes on the Wall Street bailout funds, which were never politically popular. Once Obama and Summers got the bank bailout money, they abandoned their foreclosure relief pledge.
Several Democrats have also said that after the first House vote on the bailout failed in the fall of 2008, then-Sen. Obama promised reluctant Democrats that he would pursue bankruptcy reform as president if they switched their position on the bailout. In January 2009, Summers reiterated that promise in a letter to congressional leaders.
"We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives," Summers wrote in the letter.
Within three months, according to the account Summers gave in the Financial Times, that pledge had been abandoned.