Treasury Secretary Timothy Geithner and Troubled Asset Relief Program Inspector General Neil Barofsky were both in the headlines earlier this week. Together, they demonstrate why President Obama’s approach to remedying the causes of the economic meltdown of 2008 virtually guarantees another such crisis in the near future.
Barofsky got the least attention, issuing a barely noticed report late Tuesday on the ineffectiveness of Obama’s $75 billion Home Affordable Modification Program to aid the estimated 8 million people having trouble making their mortgage payments. By offering them a government-paid reduction in their monthly payments, HAMP was supposed to stop the explosion of mortgage foreclosures that has depressed housing prices and retarded economic recovery.
Barofsky pointed out in his latest report, however, that HAMP has moved with glacial speed. A mere 169,000 homeowners have received help, leaving a mere 7.8 million in distress. At that rate, it will be years before HAMP puts a serious dent in the foreclosure crisis. A major reason for the program’s slow pace, according to Barofsky: repeated changes in regulations that have caused massive bureaucratic “confusion and delay.” Imagine that, in Washington, D.C., of all places.
Geithner told a House Financial Services Committee hearing Tuesday that the Obama administration still has no permanent restructuring plan for Fannie Mae and Freddie Mac, the gargantuan government-sponsored entities that now own or back $5.4 trillion, or 46 percent, of all residential mortgage debt. Created years ago with government guarantees against failure, Fannie and Freddie during the Clinton administration began encouraging lenders to give mortgages to millions of people who were unqualified either because of poor credit records or too little income for the amount borrowed. By the Bush years, Fannie and Freddie were packaging trillions of dollars in government-guaranteed, mortgage-backed securities that were in turn being bought and sold on Wall Street with abandon. Once the inevitable mortgage defaults began, those GSE mortgage-backed securities became toxic assets and the economic meltdown of 2008 began in earnest. The government has since taken over Fannie and Freddie and injected more than $127 billion to keep them afloat, pending their reorganization.
Geithner told the House panel that Fannie and Freddie must be reformed, but he also said there is a “strong public-policy case for preserving, designing some form of guarantee by the government to help facilitate a stable housing finance market.” But wait a minute, wasn’t ensuring stability in the mortgage market why the government created the GSEs in the first place? And didn’t those same government guarantees against failure encourage widespread irresponsible financial risk-taking by Wall Street and mortgage lenders? Won’t doing it all over again get the same disastrous results? Shouldn’t a treasury secretary, and his boss in the Oval Office, understand such elementary economics?
