Originally posted at AMERICAblog.
Eliot Spitzer has a piece in Slate wherein he offers advice to the President about how to reduce unemployment and fix the housing market. On housing, Spitzer writes:
The administration, in conjunction with the Federal Reserve, should insist that banks, in return for all the taxpayer subsidies they have gotten and continue to receive, reduce any mortgage that exceeds the value of the house. Once it is established that the homeowner is underwater, other variables can be considered to determine how much the mortgage should be reduced: the income of the borrower, the year the mortgage was issued, the behavior of the bank in recommending the mortgage, or the culpability of the borrower in misrepresenting income levels.Borrowers with reduced mortgages would have more money to spend, thus boosting the economy and relieving the housing market of a huge overhang. Owners would regain mobility, and the market could set a clearing price. Many also believe that the banks would come out ahead—facing fewer foreclosures, less abandonment, fewer houses stockpiled.
Spitzer is right that the weak housing market and the ongoing foreclosure crisis is a huge drag on the economy. Being underwater is the single largest predictor of a house being foreclosed. Large-scale principle reduction would be a way to keep homeowners in their homes, reduce foreclosures, enable more homeowners to move to pursue new jobs, and reduce the stress of unemployment and under-employment on the housing market. Spitzer is also right to point out that Wall Street banks already received their bailout from the American public. Asking for something in return now is fair and a stronger economy is better for both the housing market and the banks too.
On jobs, Spitzer’s suggestion is pretty simple:
He should establish a jobs program. Do the simple math: We are spending more than $110 billion annually in Afghanistan. Stop it. Or scale it back to the sort of covert operations and drone war that is warranted. Savings? Perhaps about $100 billion—per year. Use that money to create up to 5 million jobs at $20,000 each.
Repurposing money from war to jobs here in the US is undoubtedly a solid idea.
The real question becomes, does the administration want to pursue new ideas for job creation? Does the administration want to do what it takes to solve the foreclosure crisis? David Dayen thinks there are real new ideas that can be implemented by the administration, but they’re more interested in rehashing their original deficit reducing, job creating plans and bashing Congress for not taking action. Dayen likes Spitzer’s emphasis on the housing market and suggests a way for the administration to get widescale principle reduction without congressional say-so:
Fannie and Freddie own well over half of the mortgage market and they are full wards of the state. They could be employed to give mass refinancing deals or even principal reduction. The FHFA, Fannie and Freddie’s government overseer, has been reluctant to do this. I believe he serves at the pleasure of the President, so there are options to make that work.
It comes down to a question of what solutions the Obama administration want to deploy. It’d be great if the administration went this route, but I won’t hold my breathe for this sort of action.