Duncan Black on Social Security

Writing in the USA Today, Duncan Black addresses our national problems with saving for retirement and making sure people have what they need to get by once they’ve retired:

We already have an excellent, if not especially generous, program in place. Workers contribute during their working lives in exchange for a promised benefit level during their retirement years. This program is called Social Security.

Instead of considering some exciting new program to try to encourage workers into saving more, another Rube Goldberg incentive contraption designed to nudge individual behavior in the right direction, we should increase the level of retirement benefits in the existing Social Security program.

The goal of a retirement system should be to ensure that retired people have sufficient income to live out the remainder of their lives without a radical reduction in quality of life after they stop working. Our current system, a modest mandatory government retirement program combined with individual savings, is failing to do that. Strengthen Social Security now, not by cutting benefits, but by increasing them.


Michael Lewis on Obama on Wall Street

From Politico’s Ben White:

Michael Lewis at a PEN@Bloomberg event: “It’s a very odd Presidency. It’s odd that the stock market has doubled and [Obama is] regarded as a socialist. It’s odd that given what [Obama] could have done to big Wall Street interests, and what he actually did, that he’s as reviled on Wall Street. … Obama has been in some ways their best friend – he could have really thrown the institutions to the wolves and he didn’t do it. And it cost him a lot of good will to the left.’

‘I was surprised how calm and moderate President Obama was [about the financial crisis]. And it was one of the first things we talked about … It didn’t end up in the piece, but [President Obama] basically said, as much as one would like some Old Testament vengeance, it’s not very useful in public policy. He wasn’t angry. He didn’t have an anger about the whole thing. He was just trying to figure out the best solution to how to handle this whole mess.’

I had assumed that after the Obama administration shepherded a 49 state robosigning settlement that cost the banks as close to nothing as realistically imaginable, the Wall Street cash would have gone rushing into his campaign coffers. The crimes and misdeeds connected to fraudulent mortgage origination, fraudulent securities sales, fraudulent foreclosure, forgery, perjury, and everything associated with robosigning could have, in a just world, put every one of these banks out of business. But Obama saved them from facing real consequences for their action, just as he pivoted Congressionally funded homeowner aid programs to function to “foam the runway” for banks to prevent them from going bust.

Given that Wall Street’s gambling and excesses and illegality could have (and likely should have) derailed his presidency before it even started, it’s shocking that President Obama was incapable of being angry about it. Anger may not be the best vehicle for crafting and maintaining public policy, but anger is what should compel public policy responses in situations like these. No, I can’t help but conclude that the President wasn’t angry because (as he’s said in the past) he doesn’t believe Wall Street did anything wrong. Thus he has been their friend and protector at a time when we needed a President to rail against their gambling and hold them to account for the damage they inflicted on our country.

NYT on Obama’s housing vulnerability

Binyamin Applebaum of the New York Times has a long piece looking at how the failure of the Obama administration to adequately confront and stop the foreclosure crisis could be a drag on him politically.

Reaction to the piece from people who have been following the foreclosure crisis since its inception has been fairly negative. Yves Smith sees it as a defense of Obama’s failures to take action to help homeowners. David Dayen sees some value in it, while noting that it misses some things pretty dramatically. I tend to agree with David – while this isn’t a strong piece and it offers far more cover than Obama deserves, putting the idea that the administration left hundreds of billions of dollars on the table that could have helped home owners is really important. It’s not something that has shown up in the mainstream media much at all.

Smith and Dayen both note – and again I agree – that it’s odd for Applebaum to totally ignore recent reports from Neil Barofsky’s book that Tim Geithner made clear that the whole plan for the administration was to “foam the runway” to make it possible for banks to survive the massive wave of foreclosures we are now experiencing. The goal was not to help homeowners, but to make sure the banks could make it through the mess without another round of massive bailouts.

Dayen writes:

All of these [excuses for Obama] fall short, and by the end of the article – and this has been confirmed to me – the President is telling his economic team that they screwed up housing. But the excuses really are an insult, and they are ripped from the context, the real context, that the Administration trod slowly on housing to avoid putting the banks in any jeopardy. The fact that they had all this leverage from the fraudulent use of false and forged documents in state courts, and managed to sew it up in a slap-on-the-wrist settlement, tells you all you need to know. The White House didn’t want to go there because they were afraid they would find something that would force them to act against the banks. So they didn’t, and here we are.

Millions of people are losing their homes because the Obama administration – notably Tim Geithner and the President – did not think it was important to help them stay in their homes. I don’t think stopping this crisis is suddenly going to be a major issue in the presidential election, but it would be nice to know how both candidates plan on stopping the five to seven million foreclosures we’re likely to get in the next few years from happening.

The Housing Market

David Dayen makes some very good observations about the ongoing debate of what’s happening in the housing market, noting that we should not just be having a conversation about housing prices, but the market and its impacts on whole.

But ultimately, all of these are issues about housing prices. They are not issues about the housing market as a whole, and its relative health. Should we be OK with the fact that institutional investors like hedge funds are becoming absentee slumlords all over the country? Should we be OK that banks are holding these properties for years, waiting for the moment to dump them on the market, leading to blight in communities, disrepair, lowered home values for the neighbors, and a mark-to-myth accounting, where the bank never has to take the actual loss on the loan? Should we be OK that large states and regions are subjected to these practices, and as a result will see their economies recover far more slowly than the rest of the country? Should we be OK with low housing starts and diminished construction jobs? Should we be OK with current policy, letting housing hit bottom and clear, with years of suffering going unaided?

We shouldn’t just focus on prices in this housing recovery debate, in other words. We should look at what kind of housing market we have in the aftermath, and whether it works for the country.


Two Ratchets

Duncan Black describes the way of the world in a very similar way as I’ve been thinking about it for quite a while. Though his articulation, as always, is much more direct.

I just assume that going forward we basically have two ratchets. The one ratchet keeps getting nudged in the direction of giving more goodies to rich people, and except for possible temporary blips, those goodies aren’t going away.

The other ratchet gets nudged in the direction of fewer goodies for the rest of us. And once gone, they’re gone for good.

This is the process of how class warfare in America is actualized. And odds are if you’re reading this, you’re almost certainly losing.

Treasury’s hold over Fannie & Freddie

David Dayen has flagged a bit of analysis which says that the Treasury Department has such a large investment in Fannie and Freddie, they could compel the GSEs to do principal reduction if they wanted to. Dayen quotes Ralph Axel of Bank of America:

The FHFA’s decision also underscores the fact that the GSEs are not government agencies; they are private companies that have been temporarily taken over by their federal regulator whose specific mandate is to conserve their assets and continue their activities. As private companies, the GSE will likely respond to economic incentives. The Treasury’s power to modify the terms of the US$19bn dollar annual dividend that Fannie and Freddie (combined) owe to the Treasury is a tool of tremendous strength that could provide one such incentive.

The Treasury has the power to lower the dividend or tie it to incentives. It can tie the dividend to principal reductions or to easier underwriting standards or reduced putback activity to stimulate refinancings and new loans. The US$19bn dwarfs the US$3.6bn savings that the FHFA found from principal forgiveness. This is not housing finance reform, but it is a way to create effective temporary stimulus without raising additional federal debt while simultaneously moving toward larger structural changes.

David goes on to note:

And the fact that they are not making these conditions tells you a lot about whether or not the objections at Treasury to DeMarco’s decisions represent something real or something convenient for the election period. Geithner may be pinning the blame for the continued problems with underwater borrowers on DeMarco to deflect criticism away from the Administration. But he’s unwilling to do anything about it. And that tells the tale.

I don’t know anyone on the left who disagrees with the idea that Fannie and Freddie should be doing widescale principal reduction. But the idea that Ed DeMarco is a master villain beyond the prolonged foreclosure crisis and the lack of principal reductions just isn’t true. There have been numerous opportunities for the Obama administration to enact principal reduction which they have repeatedly elected to not take. Likewise there are outstanding ways for them to do these policies, but again they choose not to.

This isn’t to say that DeMarco is wrong and the country wouldn’t be better off with someone who supported helping homeowners at the head of FHFA. But the same could be said of having a Treasury Secretary who did this, or a head of HUD or the SEC or the DOJ who thought banks should be prosecuted for foreclosure fraud, instead of coddled and protected. Fire DeMarco? Sure, but let’s make sure Geithner and company are moved out with him.

…Adding, in another post about the SEC and DOJ choosing not to prosecute Goldman Sachs, Dayen notes:

Incidentally, there is one bit of exposure left for Goldman on this particular batch of Fremont loans. One federal entity has sued Goldman and other banks for misrepresenting mortgage-backed securities. That would be the Federal Housing Finance Agency. That Ed DeMarco is such a scoundrel.


Looming tax peril for underwater homeowners

David Dayen has a story at Salon that is genuinely must-read. He’s flagging the fact that for the last three years, there has been a federal law which excludes principal reductions from homeowners from taxation. Any amount of debt that is written off by banks during a mortgage modification has not been counted as taxable income. That law will expire at the end of 2012, making it likely that homeowners who receive principal reductions, sell their homes at short sale, or received compensation as part of the national mortgage settlement or Servicemember Civil Relief Act settlements will have to pay federal taxes on the money. Given that these are almost entirely people who are in foreclosure due to a lack of money, this could be devastating.

Imagine struggling near foreclosure in an underwater home – you bought it for $300,000 but now it’s only worth $200,000. You get your bank to make a deal to keep you in your home, cutting the principal on your mortgage by $100,000. Great! Only if this law expires and the mortgage modification happens after its expiration, you’ll now be sent a federal tax bill that could be $20-30,000 or more, depending on your income. It’d be crushing.

If this tax policy isn’t dealt with and comes into existence next year, it would be as functionally stupid as any which exists in America today.

What’s terrifying is that extending this law would be a tax cut at a time when Washington is captured by deficit fever. Per Dayen, “the Congressional Budget Office estimates that excluding principal reductions from taxation for two more years will save recipients $2.7 billion.” $2.7 billion isn’t a ton of money, but it isn’t nothing either. Since we’re facing a fiscal cliff, plus the expiration of the Bush tax cuts, plus the debt ceiling, it’s clear that Congress will be looking for ways to save money, particularly from powerless constituencies. And given the lack of action by Congress to aid homeowners, it’s hard to imagine a less powerful constituency than homeowners at risk of foreclosure.

Nonetheless, there are multiple pieces of legislation moving through the House and Senate aimed to extend the protection for homeowners. Keep in mind that the initial law was set to expire after three years because it was assumed the housing crisis we were in would be over by then. Obviously that assumption was wildly optimistic. We need a fix that will survive on a long enough term to actually right the housing market. Dayen again:

At stake is the future of the housing market itself. Though analysts keep touting a bottoming out of prices and home sales, the numbers suggest that there’s still a long way to go, and the biggest stumbling block remains negative equity. “For us to get to a housing recovery, we really do need significant principal reduction,” said Rheingold. “As we’re seeing the first signs of doing any principal reduction or short sales, if this tax relief is allowed to expire, it would really do tremendous damage.”

Senator Debbie Stabenow and Rep. Jim McDermott have both introduced bills to fix this. Stabenow’s is just a one year extension, though McDermott’s is quite comprehensive. It’s easy to imagine dealing with this issue becoming a yearly task for Congress, as no one wants to do anything that can be seen as contributing to the debt long term. As a result, homeowners at risk of foreclosure may remain in an even more precarious position for a long time to come. This is the real sort of uncertainty which hurts people and the economy (as opposed to the fictional uncertainty which fuels invisible bond vigilantes).

This issue has largely flown under the radar to this point in time. Hopefully Dayen’s reporting, as well as work being done by activist groups like ACCE, will put pressure on Congress to act quickly. The longer this goes unresolved, the more likely it will be lost in the coming hysteria around expiration of the Bush tax cuts, sequestration, and the debt ceiling.

SEC blows a lay-up

Yves Smith and David Dayen have good takes on the SEC’s failed criminal prosecution of Brian Stoker, a former Citibank executive who was caught dead to rights for misleading investors on a CDO offering. David fears the outcome will be even less (hardly possible!) criminal prosecutions from the SEC:

Sadly, if the SEC can’t secure a conviction in a relatively open and shut case like this, it’s almost certain that they will fold up their tent and stop even a semblance of aggressive prosecutions against the banks. It doesn’t appear they have the personnel available to do the job. After 20 years of near-consistent defunding, I’m not that surprised.

Yves similarly thinks less prosecution will be likely as well, though she provides a vision for what law enforcement should look like when it comes to financial crimes.

Having been exposed as inept, the SEC is guaranteed to avoid another public embarrassment. So they will continue to draft claims that get good PR and settle cases. And it is a no brainer that the Obama Administration will refer to this decision as further proof that it is just too hard to pin anything on those bank executives. One has to wonder, given SEC enforcement chief Robert Khuzami’s deep involvement in the CDO business (he was general counsel of the Americans at Deutsche Bank from 2004 to 2009) and the Administration’s insistence that it’s pointless to even try to prosecute bank executives, whether this case was thrown, as opposed to merely lost. But absent evidence, never attribute to malice that which can be explained by incompetence.

Charles Ferguson and Eliot Spitzer are right. If anyone was really serious about going after bank misdeeds, the path of action would be to go after how bankers pay for drugs and prostitutes on the company dime. This would not be hard to prove and the threat of jail time would get them to sing. But it’s long been apparent that the problem is not the lack of viable courses of action, but lack of will to undermine the rule of our financial overlords.

The lack of will stems from a disbelief that Wall Street should be held accountable the way regular people are held accountable for their crimes.