The Economic Team and the Foreclosure Crisis

By Alan White  

So far President-Elect Obama's economic team, while perhaps full of bright people, reflects very little diversity in viewpoint, coming mostly from the mainstream, centrist, a-little-Keynsianism-is-OK-but-not-too-much school of thought.  Notably missing are any economists one might regard as leftist, or even genuinely liberal in the American sense.  None of the announced advisers to date concern themselves primarily, or even very much at all, with issues of poverty, labor, housing, or the unequal distribution of wealth and income.  None could be characterized as a fan of regulation of markets, as a matter of principle.  

A brief search for their writings on the the foreclosure crisis produces very little.

Larry Summers wrote a a reasonable column for Financial Times earlier this year, in which he advocated bankruptcy reform to allow homeowners to reduce mortgage debt to property values, and to swap debt for equity.  Austan Goolsbee, on the other hand, wrote a wretched piece in March 2007 warning against regulation of subprime mortgages, based on the erroneous factual assumption that subprime mortgages expanded homeownership for minorities (who are in fact losing billions in home wealth as a result of subprime foreclosures, which are approaching 50% of subprime loans.)  Thankfully the Federal Reserve and other regulators have not heeded this advice.  If anyone knows of anything Christina Romer, Paul Volcker, or Tim Geithner have written on the subject, let me know.

While some of these economists may be pragmatists, their deeply held biases favor the unregulated market that has brought the present catastrophe.  Thus far, I don't hold much hope for a transformative administration, on the foreclosure crisis front, or for that matter on the new regulatory architecture for financial services generally.   

Comments

[Steve Daily]

I read the Austan Goolsbee piece, and am straining to understand what could possibly be considered "wretched" about it. In sum,
Goolsbee argued for caution in changing subprime mortgage regulations, because he was concerned that excessive or ill-considered
"reforms" could hurt minorities and low-income individuals. His piece was not a "warning against regulation of subprime mortgages," as you describe it, but rather a warning against excessive and ill-considered new regulations that could have unintended consequences harming the disadvantaged. Who could take exception to that?

And when was Goolsbee's advice "rejected" by the Federal Reserve? As Chairman Bernanke wrote a few months later regarding the Fed's proposed amendments to the rules under the Home Ownership and Equity Protection Act, "The Board is responding to these problems [fraud, deception, and unfairness in the mortgage market] with proposed rules that were carefully crafted with an eye toward deterring improper lending and advertising practices without unduly restricting mortgage credit availability." http://www.federalreserve.gov/newsevents/press/bcreg/bernankehoepa20071218.htm.

For President-Elect Obama, it seems so far that "change" means hiring pragmatic moderates rather than extreme ideologues. Some on the left are bound to be disappointed, but that is no reason to distort the record of Austan Goolsbee.

[Alan White]

The context in which Goolsbee wrote in early 2007 was the federal regulators' proposed guidance on nontraditional mortgages. The FFIEC agencies were proposing to require that mortgages with escalating payments, prevalent in the subprime and alt-A space, be underwritten so as to establish the homeowner's ability repay not just the initial payment but the escalating payments over the term of the loan. Countrywide and other lenders vehemently opposed the guidance on the basis that it would dry up mortgage lending (true, but hardly an argument against the kind of lending that was going on in 2007.) Goolsbee called these mortgages innovative and beneficial, when it was clear even then that they were resulting in high rates of foreclosure, not homeownership. The rating agencies now project that 50% or more of 2006 and 2007 subprime mortgages will result in foreclosure. The federal agencies went ahead with the guidance, and the Fed eventually published its HOEPA rule. Those very modest steps at reining in irresponsible mortgage lending were the only proposals on the table, and Goolsbee was objecting, based on factually incorrect (and, I would argue, ideological) assumptions about the effects of subprime lending on minority homeownership.

I'm not opposed to hiring pragmatic moderates, but it would be nice to include perhaps just one bona fide liberal or progressive economist to provide a bit of diversity, without the need for any extreme ideologues.

[Brian]

Excellent post and commentary.

[Brian]

Excellent post and commentary.