The Bush and Obama Administrations Chose the Big Banks Instead Over the American People
Treasury Secretary Geithner – and other key players in the Bush and Obama administrations – pretended that they were helping homeowners.
But it is now beyond dispute that that they didn’t really care about helping homeowners … they only wanted to foam the runway” for the big banks.
Geithner made the pathetic excuse in his new book that helping homeowners wouldn’t have helped the economy. And he used blatantly false numbers to do it.
As two prominent economists – Atif Mian (professor of economics and director of the Julis-Rabinowitz Center for Public Policy and Finance at Princeton) and Amir Sufi (Chicago Board of Trade Professor of Finance at the University of Chicago Booth School of Business and co-director of the Initiative on Global Markets) – note at the Washington Post’s Wonkblog:
Tim Geithner has a problem with helping underwater homeowners…. He claims he doesn’t like the idea because the economic effects of helping underwater homeowners would have been small. But that is dead wrong.
Here is a paragraph from his book:
Even if the federal government had borrowed and spent $700 billion to wipe out every dollar of negative equity in the U.S. housing market—a “principal reduction” program of utopian proportions—it would have increased annual personal consumption by just 0.1 to 0.2 percent.”
What would have been the direct spending effect? The answer depends critically on the marginal propensity to consume (MPC) out of housing wealth. That is, if we forgave $1 of debt, how much of that $1 would an underwater homeowner have spent?
This is a very well-researched question. Most place the MPC out of housing wealth between $0.05 and $0.10 per dollar.
We have an established body of research that suggests that the MPC out of housing wealth is between $0.05 to $0.10 per dollar. And Mr. Geithner’s uses an estimated MPC that is less than half the lower bound estimate from the literature. Without going any further, we immediately know that his estimate is too small.
We have estimated the housing wealth effect in our own research published in the Quarterly Journal of Economics. Our study focuses on the Great Recession which is the most relevant sample for evaluating Geithner’s assertion. We find an estimated average MPC out of housing wealth between $0.05 and $0.07 per dollar.
Mr. Geithner is off by an order of magnitude, even if we narrowly focus on the direct spending consequences of principal forgiveness.
In our book, we do a careful calculation quantifying both the direct and indirect effects of debt forgiveness, and we show that debt forgiveness would have had an enormously positive effect on the economy. It would have made the Great Recession far less severe. To be clear, we support write-downs that impose losses on creditors not taxpayers. But the basic point remains – more debt forgiveness would have provided a significant boost to economic activity when we most needed it.
Economists from all backgrounds [both liberal and conservative] overwhelming agree with us, contradicting the claims of Mr. Geithner.
The New York Times comments:
[Mian and Sufi’s] research is now widely cited as demonstrating that the overhang of household debt contributed to the slow pace of the recovery; one such citation came in the 2012 Economic Report of the President. Alan Krueger, a Princeton economics professor who wrote the report and was then the chairman of the president’s Council of Economic Advisers, said he considered their work important for suggesting that in areas where the economic recovery was slow, “that weak demand was the source of their economic problems, not credit market failures.”
***The only way out, Mr. Mian and Mr. Sufi say, is for society either to forgive the debts, or to step in and impose some of the losses on the creditors instead of the borrowers.
“There was more of an agreement in the past that in the face of aggregate shocks, debt would be forgiven,” Mr. Sufi said. “Go back to the Code of Hammurabi, and it says that if no rain comes, all the debts are going to be cleaned. Our problem with debt in the modern world is that that implicit agreement seems to have broken down. When we have aggregate shocks now, you have people yelling that people are irresponsible.”
Indeed, the the ancient Sumerians and Babylonians, and the early Jews and Christians all knew that creditors had to periodically forgive debt, or else the economy would crash.
And economist Steve Keen notes that 138 years of economic history shows that it’s excessive private debt which causes depressions … and that we’ll have never-ending economic problems unless creditors write down some of the debt.
But As Upton Sinclair noted:
It is difficult to get a man to understand something, when his salary depends upon his not understanding it.