November 23, 2012

AS ANOTHER year draws to a close, the mind turns naturally to might-have-beens. Economists, it seems, are no exception. A number of them, including former advisers to the president, are relitigating the Obama administration’s efforts to bail out distressed homeowners, telling The Post’s Zachary A. Goldfarb that a more aggressive approach would have pumped more cash into more households faster, thus bolstering consumer spending and overall economic growth. The recession might have ended sooner.

Not necessarily, administration defenders respond; the United States still would have suffered from the effects of the 2011 tsunami in Japan and the 2012 drought. And that’s assuming a big mortgage-relief plan could have overcome the political opposition that met President Obama’s efforts. As Treasury Secretary Timothy F. Geithner puts it, “We chose the best of the feasible options.”

Who’s right? Certainly, homeowners have not benefited as much as one might have hoped from the Federal Reserve’s low-interest-rate policies. Though the Fed has driven the average 30-year mortgage rate down to an all-time low of about 3.3 percent, the majority of loans guaranteed by Fannie Mae and Freddie Mac are still well above 5 percent. Additionally, about a fifth of homeowners owe more on their homes than they are worth on the market. Yet due to a variety of issues — bank resistance, opposition from Fannie and Freddie’s regulators, hesi­ta­tion by borrowers themselves — there have been no mass refinancings or principal write-downs.

Last year, Glenn Hubbard, a Columbia University economist and Mitt Romney adviser, suggested giving about 25 million borrowers already in government-backed loans a near-automatic refi at 4 percent. That would have provided the equivalent of a long-lasting tax cut worth $70 billion per year, he argued.

All such plans, however, have costs as well as benefits. There is simply no denying the “moral hazard” that could result from seeming to reward borrowers who took on more debt than they could handle, a problem that would be especially acute in the case of principal reductions. The Obama administration struggled mightily, and with mixed results, to define a group of borrowers who could be described as both “responsible” — that is, able and willing to pay their debts — and likely to benefit from relief.

Equally important, the costs of a plan such as Mr. Hubbard’s would have fallen mainly on the owners of Fannie Mae and Freddie Mac bonds. Though perfectly legal, mass prepayment of those securities at less than current market value would have hit banks, pension funds and insurance companies hard. No doubt these institutions would have passed the costs along, thus blunting the stimulative effect of mortgage relief.

Maybe the good news is that this is increasingly a moot point. Housing is healing, albeit slowly, as are household balance sheets. Deutsche Bank economist Joseph LaVorgna estimates that households are on course to wipe out the excessive leverage of the bubble years within 15 months. This sets the stage for renewed consumer spending. If Americans learn the right lessons from the last decade of debt-fueled prosperity, the next wave of consumer-led growth may be more sustainable than the last.