Publication of Timothy Geithner’s Stress Test last week has unleashed a torrent of reactions, including a tough critique of the Obama administration’s efforts to address the housing crisis that accompanied the financial meltdown in 2007 and 2008. Battle lines are clear. Geithner argues that the administration “chose the best of the feasible options,” suggesting that more direct efforts to mitigate the fallout of the housing crisis were politically untenable (even “unicorny”). Geithner’s critics, including Paul Krugman here and Atif Mian and Amir Sufi here, argue that the administration’s response to the mortgage crisis was wholly inadequate: Mian and Sufi suggest that a program of mortgage debt forgiveness could have attenuated the severity of the Great Recession.
Geithner’s claims about the political feasibility of stronger intervention into housing markets merit a closer look. At issue is the policy proposal known as “cramdown,” a proposal that would have reinstated the ability of bankruptcy judges to modify mortgages for homeowners entering bankruptcy. The House adopted a cramdown proposal early in 2009, but subsequent House and Senate efforts in 2009 failed. The 2009 votes are pivotal for assessing Geithner’s claims, who noted recently that the White House tried twice to get cramdown through, but both times were unable to get enough Democrats to support it.
First, we can get a broad sense of the partisan geography of the mortgage crisis inherited by the Obama administration from this figure (which aggregates September 2008 foreclosure data from RealtyTrac up to the congressional district level). Blue dots mark districts represented in 2008 by Democrats; red dots, Republicans. Perhaps most notable (at least for a student of Congress) is that both red and blue districts were hard hit by the mortgage crisis. The same partisan pattern prevailed after the election: there was no significant difference in foreclosure rates across red and blue districts when President Obama took office.
Second, consider the two House votes in 2009 to authorize cramdown. The March vote passed 263-164; the December vote failed 188-241. Democrats voted lockstep in favor in March, joined by just seven Republicans (generally from districts harder hit by foreclosures). The Senate in April, however, killed Sen. Dick Durbin’s (D-Ill.) hard-fought effort to adopt cramdown: 12 Democrats (generally from more conservative states less hard hit by the mortgage crisis) defected from their party to join every Republicans voting no.
What changed in the House in December? The figure below suggests the source of the Democrats’ troubles. Based on the December vote, I simulate the likelihood of Democrats voting in favor of cramdown as a function of the foreclosure rate in their district. (I also control for freshman status, Obama’s 2008 vote in the district and the percent of the district employed by the finance industry.)
Democrats representing districts that voted for Obama largely maintained their support for cramdown: the probability of a yea vote increased just slightly with the severity of the mortgage crisis back home. But Democrats representing districts won by John McCain in 2008 were markedly less likely to support cramdown this time, especially if their districts were relatively untouched by the housing crisis. With the Rick Santelli rant against bailing out homeowners and populist critiques of the Democrats emerging from the right, more vulnerable Democrats were first to abandon cramdown.
Stepping back, it seems that a window of opportunity closed in the House over the course of 2009. Cramdown was never an easy get, particularly with Democrats needing to hold 60 votes to overcome GOP opposition in the Senate. Still, at the height of Democratic power that year, the Obama administration might arguably have leveraged its majorities on the Hill (and its brief filibuster-proof Senate) to find a path to passage for cramdown. (Democrats might at least have pulled a Frank Luntz and abandoned the banking industry’s “cramdown” moniker.)
As journalists’ accounts suggest, however, the administration never leaned in. Accounts in Pro Publica and the New York Times, for example, raise doubts about the administration’s commitment to the cramdown proposal. As former assistant Treasury secretary Michael Barr has noted, “There wasn’t enough political capital, time or energy.” Democratic lawmakers had a similar impression. As Blue Dog former member Rep. Jim Marshall (D-Ga.) who sponsored the December cramdown effort observed, “We would propose that this stuff be included and they kept punting.” The Obama White House reportedly discouraged lawmakers from including cramdown in the sure-to-pass stimulus bill in February 2009, and candidate Obama had previously persuaded Democrats to keep it out of the must-pass TARP bill during the 2008 campaign. Moreover, former chairman of the Senate banking panel, Chris Dodd (D-Conn.), noted the intense lobbying of community bankers, a group deeply rooted in most congressional districts. With their opposition, Dodd said, “you don’t win much.” Finally, in The Washington Post’s account, Geithner dismissed the utility of debt relief for homeowners, suggesting that it would do more economic harm than good.
In Stress Test, Geithner makes a far broader claim about the economic necessity of saving Wall Street– rather than fundamentally reforming it. He dismisses more politically palatable solutions as the “central paradox” of financial crises: “What feels just and fair is often the opposite of what’s required for a just and fair outcome.” For now, put aside whether lessening household debt with unspent TARP funds would have precluded a just and fair outcome if coupled with the Wall Street bailout. I think it’s fair to say that the cramdown episode highlighted the administration’s discomfort with more aggressive financial reform (reflecting the views of the Wall Street wing of the Democratic Party). The White House seemed to prefer working within existing political constraints rather than challenging them. Channeling public anger in the wake of the financial crisis seems not to have been a White House priority. With a still sluggish housing recovery today, one wonders about the longer-term economic consequences of that political choice.