Just before President Bush took the stage at the Economic Club of New York today to deliver his take on the state of the U.S. economy, the Federal Reserve Bank of New York and JP Morgan Chase & Co. were nearby, busy rescuing Wall Street’s fifth-largest investment bank, Bear Sterns Cos., from the fallout from the rolling U.S. housing crisis and global credit crisis. The timing couldn’t have been worse for the president.
President Bush’s economic cheerleading today, alongside his administration’s non-solutions to the housing crisis, make it clear that he doesn’t really understand the causes of the crisis or the details of his administration’s own proposed solutions. Perhaps we should applaud that he acknowledged that the root cause of the current economic problems is the housing market crisis, though he should have also noted his administration’s mishandling of the federal budget, the trade deficit and regulatory oversight. But then he falsely characterized the views of leading advocates for government action—from former Clinton administration officials Larry Summers and Laura Tyson to congressional housing leaders Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA)—by accusing his critics of believing anything short of massive government intervention is inaction.
Problem is, the president still insists on purely voluntary measures to help responsible homeowners cope with the expanding housing crisis, even though the voluntary mortgage-relief efforts of the administration-led HOPE NOW Alliance of lenders, investors, and mortgage servicers have only helped on the margins of the crisis. Bush and his Treasury Secretary Henry Paulson instead need to work with Sen. Dodd and Rep. Frank to enact meaningful mortgage refinancing reforms.
Indeed, Paulson yesterday unveiled what he and the president evidently had hoped would be financial market confidence-building proposals—a set of mortgage-market reforms that will do nothing to contain the damage caused by the implosion of the U.S. housing bubble. In fact, many of these proposals are a rehash of what Clinton administration officials Summers and Andrew Cuomo called for in 2000, as CAP Senior Fellow Michael Barr pointedly noted yesterday to Bloomberg News.
If some of those steps had been taken before the housing bubble grew to such dangerous proportions (and if other steps had been taken to provide better transparency and realistic risk assessment of complex mortgage-backed securities), then Federal Reserve Board Chairman Ben Bernanke and other central bank chiefs might not have had to take their coordinated action earlier this week to unfreeze global credit markets. The central banks’ decision to accept as collateral mortgage-backed securities when financial services institutions needed to borrow short term funds from them was certainly necessary, but that step alone will not resolve the central problem facing the economy—too many U.S. homeowners facing foreclosure and too many of their neighbors potentially lining up behind them.
The foreclosure crisis is very real and growing exponentially, yet the president explicitly rejected Congress’s version of CAP’s Great American Dream Neighborhood Stabilization, or GARDNS proposal, which would provide $4 billion to buy up real-estate owned by banks and put deserving families in those homes. Those foreclosed properties clog local housing markets, drive down neighboring property values, and attract crime, vandalism, and arson. The properties would be bought at a steep discount, without any bailout to banks.
Still, the president did acknowledge for the first time today what most people have known for a while—many people with adjustable-rate mortgages did not understand what they were buying. This is a sea change from previous statements, which stated everyone understood what they were signing when they took out their loans. Unfortunately, while the president’s sympathies may now lie with the American homeowner facing foreclosure, his much-touted voluntary FHASecure program and HOPE NOW alliance are unable to address the growing number of delinquencies and foreclosures.
To cope with the foreclosure crisis and all its cascading ramifications for world financial markets and the U.S. economy, the Bush administration and Congress need to enact legislation that will help responsible homeowners refinance their mortgages at reasonable rates, which in turn will enable the global marketplace for mortgage-backed securities to find its footing and begin to price these tradable securities at realistic values and better understand their risks. Taking that critical set of steps in turn will begin to unfreeze U.S. and global credit markets, where plenty of capital is waiting to be invested in a true economic recovery.
Andrew Jakabovics is Associate Director of the Economic Mobility Program at the Center for American Progress.
For more information about the Center for American Progress’ policies on the housing crisis see the Housing page of our website or for specific information on our legislative proposals go directly to the following reports: