The terrible wrongness of the Ryan budget plan combined with the strangest, craziest Republican presidential candidate field ever makes it rather obvious how important it is to get President Obama re-elected. To have extreme right Republicans (that seems to be pretty much all of them these days) control every branch of government would do even more damage now, as weakened economically as we are, than the 2003-2006 run they had with Bush and Congressional Republicans running everything -- and think how ugly that was for the country. The good news is that Republicans are doing a very good job right now showing how bad they are, with this weak field of presidential hopefuls in all-out pander mode to the far right of their party, and the lockstep support for the Ryan budget showing how extreme they are -- not just on Medicare but on a wide range of other major issues. And I feel good about many of the Obama team's moves so far this cycle, especially creating Democratic unity around opposition to Ryan's budget.
However, as is obvious to pretty much everyone who follows politics at all (and probably a fair share of people who don't), the continued problems with our economic trajectory is going to remain a serious problem dragging down the president's re-election chances. Conventional economists and D.C. politicos, who generally focus on fiscal policy to the exclusion of just about everything else, feel stymied because they feel like the economy needs another fiscal stimulus package, and they know that is the exact opposite direction that House Republicans want to go. As a result, most people in Washington have pretty much given up on improving the economy between now and the 2012 election, and are devising strategies for Obama around running without the background of an improving economy.
It is a very bad thing that Republicans, for all their lip service about jobs, don't want to do anything to actually promote, and that their budget policies will force many more people to lose their jobs as well. But the ironic thing is that President Obama does not have to depend on Republicans to provide a major boost to the economy right now. What the president can do to boost the economy is to put his energies into restructuring and rebuilding the housing market. The fact is that the single biggest thing dragging the economy down right now is the housing sector, which is in terrible shape right now and continues to get worse. Home prices, already at lower levels than at the worst point in the housing crash of 2008-9, are dropping like a stone. Almost 30 percent of mortgage holders are underwater (what they owe on the house is more than what it is worth). Foreclosures are sky high for the foreseeable future. With middle-class families' biggest financial asset by far being their house, and home prices low, while foreclosures are high, it means middle-class assets are being decimated. And with no one buying homes, it means no one is building homes either. With the housing sector as huge a part of the economy as it is, as long as these kinds of trends prevail, we are not going to make the economy work well for the broad middle class.
But look at what could happen if we address this issue head on. SEIU did a report a few months back on the economic impact of shoring up the housing market, and it showed some pretty remarkable things. Here's what I wrote when their report came out:
... this report does a great job of laying out the numbers in stark detail. Bank robber Wee Willie Sutton famously said that the reason he robbed banks was because that was where the money was, and if we are looking to get our economy moving again, we should be looking to get the money to do it where the money is. Right now, more than ever, the Big Banks are where the money is concentrated. The most important fact by far in Big Banks Bonus Bonanza is this one: Right now, 11,000,000 American homeowners owe $766 billion more on their mortgages than their homes are worth, but if the banks were to write down those mortgage principals to market value and refinance them into 30-year, fixed-rate loans, you would get $73 billion pumped directly back into the economy -- every year for the next 30 years.
Now unlike extending tax cuts for the rich or reducing the estate tax, which tends to be saved and invested in long term bonds, this money would go directly into stimulating the economy and creating jobs. Think about who those 11,000,000 underwater homeowners are: They are almost entirely middle- and working-class families who have spent the last couple of years sweating bullets to save their main life investment after its value plummeted by 20 percent, 30 percent, or more. They haven't been spending money on new products, they haven't been taking any vacation trips with their families, if they own a little mom-and-pop business they sure haven't been taking any risks to expand it: They have just been desperately scrimping and saving and trying to hang on by the skin of their teeth. But if their mortgage is reduced to what their house is actually worth in today's market, that means their overall financial situation is far more stabilized, and it means their monthly mortgage payment will go down as well.
With a stabilized debt and lower monthly mortgage payments, with the psychological weight of probable foreclosure off their shoulders, these middle-class homeowners (at least the ones with jobs, which is most of the folks who still have homes) are exactly the kind of people who will be likely to start spending a little money in this economy. Maybe they will finally buy the car they have been holding off on now for years. Maybe they will do a little home improvement now that they know they will be able to stay in their home. Maybe they will feel able to finally make the investment in their small business they have been wanting to make, and hire a few extra folks as a result. The economic multiplier effect of this $73 billion would be as good as any money injected into the economy right now.
You want to know what the second most important fact in this report is? The $73 billion it would cost to write down those mortgages would be only half what the top six banks alone are getting ready to write in bonuses and compensation for 2010. If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages, the vast majority of which go to top executives and traders, by 50 percent. Given all the cash these banks are sitting on, all the profits made and bonuses distributed in recent years, I have no doubt they can afford the hit. The ironic thing is that if they wrote down these mortgages, they would be getting monthly mortgage checks from all these homeowners, plus avoid the costs of all those foreclosure proceedings, but they don't want to write down the property because of their own phony accounting that claims the properties are worth far more than they actually are.
So here's the other little nugget the report alludes to: If you injected $73 billion into the economy through these write downs, the multiplier effects I was referencing earlier -- homeowners being able to free up cash to buy things and invest in small businesses and do home improvements -- would mean 1.8 million new jobs. That is a lot of jobs, folks: enough to drop the unemployment rate from the almost 10 percent it has been sitting at for a very long time down to the mid 8s. And it would finally begin to stabilize the housing market, which would do a lot for the economy all by itself.
The problem is this: you have to take on the biggest banks on Wall Street to clean up this mess. And let's be clear: Congress would not be on the side of the administration if they did take on those banks. Even when Democrats controlled both Houses of Congress by wide margins, Sen. Dick Durbin famously commented that that banks "own the place," and now of course it is far worse: the Republican chair of the banking committee told bankers that his mission was to serve them, and the entire party is doing everything it possibly can to slow Elizabeth Warren down in her efforts to help consumers. But with all their sound and fury on behalf of Wall Street, let's be clear on one other thing: the Obama administration does not need the Congress to do anything on this issue. The executive branch proved conclusively during the financial crisis that when something is important enough to them, they can do what they need to do and get the bankers to play along. If the regulatory agencies, the Department of Justice, and the Treasury Department, along with state AGs like Eric Schneiderman who already are putting the heat on -- these bankers would have to go along with writing down a very big number of underwater mortgages, and cleaning up their foreclosure servicing operations in general. With fiscal stimulus out of the question, nothing the Obama administration could do right now would do more to help this economy.
This makes economic sense and political sense, but Tim Geithner continues to stand firmly in the way. He continues to tell members of Congress and consumer and labor advocates he privately meets with that his hands are tied, there is nothing he can do, but in fact there is plenty he could do, he just doesn't want to. Geithner is convinced that if you harm the banks, you harm the American economy -- and if you help the banks, you help it. And the banks, whose balance sheets look so much better because the Mark-To-Model accounting system they use allows them to value the housing assets they hold at some inflated rate they project in the future when they assume the housing market will suddenly be better than it was in 2006, are telling Geithner that if they are forced to write down these mortgages, their accounting will show they have lost money. God forbid their books show their assets at what they actually are worth, because then they won't be able to pay executive bonuses at such a high level.
Given the makeup of Congress, Obama has just one chance to dramatically improve the American economy before the 2012 election, and that is to move aggressively to revitalize the housing market. He'll have to take on Wall Street to do it, and he'll have to pick a fight with them and their Republican allies in Congress. It's a political fight worth having, and most importantly it would put our economy on the right path by giving it the jumpstart it needs.