The strongest case against the Obama administration's economic policy goes something like this:
Early on, the Obama administration misunderstood the unusual nature of the crisis. You can see it in its forecasts, which predicted a rapid, "V"-shaped recovery even if Congress didn't pass a stimulus bill. And you can see it in the administration's policies, which focused on supporting the financial system while it kickstarted growth by putting people back to work, handing out tax cuts and stopping state and local governments from laying people off.
The precise nature of the administration's misunderstanding was that the key problem was household debt, and until that problem was solved the economy couldn't recover. But while it had a clear strategy for attacking bad debt in the banking system, and a clear strategy for attacking the fall in consumer spending, it never had a clear strategy for reducing housing debt.
Instead, the administration believed that the best and fairest way to fix the housing system was to fix the economy. If people had jobs and tax cuts and unemployment insurance, they would be able to pay their mortgages and they would be able to buy new homes and that would take care of the housing problem.
That did not take care of the problem-- it did not come close to taking care of the problem.
So one view is that the administration basically got the crisis backward. You couldn't fix the housing crisis by fixing the economy. You had to fix the economy by fixing the housing crisis. And the administration's housing policy wasn't anywhere near sufficient to do that. This mistake was doubly disastrous because monetary policy, which would normally be a huge driver of recovery, typically works through the housing market, encouraging consumers to buy new homes while interest rates are low. Leaving the housing market's dysfunctions to fester also meant that the Federal Reserve's efforts to lower long-term interest rates had little affect on the economy.
In this morning's New York Times, Binyamin Appelbaum tells the story of the administration's disappointing housing policy response. It's worth reading alongside Zach Goldfarb's September look at the same subject. Together, the articles make an ironclad case that the Obama administration's housing policies failed to fix the housing crisis, in part because they never really tried to fix the housing crisis.
As Appelbaum puts it, while Obama "poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy," he "tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest."
That's because, in part, key members of the administration came to the conclusion that they didn't have good options on housing policy. The politics were terrible, the mortgage servicers were incompetent and the gamechanger options were costly. As Treasury Secretary Tim Geithner told Goldfarb, “We do not believe that there were feasible alternatives available to us within our authority that were better.” On the other hand, they did believe there were feasible alternatives on, say, stimulus that were better. And so they put their energy into securing more stimulus rather than fighting for more aggressive housing policies.
The right question on housing, then, is not whether the administration's policies proved insufficient. They did. It's what would have been better. And that's not a question that either Appelbaum or Goldfarb conclusively answer. It's not even a question that the most credible critics of the Obama administration's housing policies conclusively answer.
Amir Sufi is an economist at the Chicago Booth School of Business. Alongside his frequent co-author, Berkeley's Atif Mian, Sufi has done some of the most important, persuasive research showing that household debt was at the center of this crisis -- proving, for instance, that the recession began earlier, and lasted longer, in counties with high debt levels.
Sufi, who believes strongly that stimulus is important, is unsparing in his criticism of the administration's housing policy. "I am convinced that failure to address the household debt and housing problems will be remembered as the chief economic policy failure of the Great Recession," he says. "People will look back 20 years from now and be shocked that nothing major was done to address these problems."
But even Sufi is not quite sure what should have been done. The theory of the case is clear, he wrote in a column for Bloomberg View. "The critical problem is the high level of debt in the household sector. So why doesn’t macroeconomic policy directly combat this problem?"
The difficulty comes when you try to actually design a debt-forgiveness program. As Sufi writes, a successful debt-forgiveness program needs to target the households "whose consumption behavior would be materially changed." Unfortunately, that's hard to do. "What is more likely to happen is that all underwater homeowners would line up for relief. This would lead to government expenditures far larger than most taxpayers would accept."
Sufi didn't have an answer. Rather, he concluded his column with a prayer. "If policy makers would acknowledge the drag on the economy from excessive household debt, a fix may present itself," he wrote. "I’m certainly open to suggestions."
And beyond the policy design questions, there's the political question. Taxpayers don't mind a broad-based tax cut, or a program to rebuild bridges and roads, or even increased help for the unemployed. But hundreds of billions of dollars that go to the homeowners who got into mortgages they couldn't afford and stopped paying rather than to more responsible homeowners who scrimped and saved to keep up with their payments? That's a tough political sell.
Doug Holtz-Eakin was the chief economic adviser to John McCain during the 2008 campaign and he proposed a widespread debt-forgiveness plan. The only problem? “No one liked that plan,” he said. “In fact, they hated it. The politics on housing are hideous.” Recall that the Rick Santelli-rant that kicked off the tea party was aimed at the modest, limited housing policies that the Obama administration actually did propose.
And yet, for all that no one quite knows the perfect housing policy, the Obama administration's execution of the ideas it did believe in left much to be desired. The administration didn't officially nominate anyone to head Fannie and Freddie until November of 2010 -- long after it had lost the power to muscle its nominees through the Senate. The result has been that Fannie and Freddie are run by Ed DeMarco, a cautious civil servant who has continuously blocked the Obama administration from using the housing giants to help homeowners.
Similarly, while the Obama administration may not have been able to get a widespread debt-forgiveness plan past Congress, it had a number of opportunities to push "cramdown," which would have allowed bankruptcy judges to cut mortgage debt. But it resisted calls to put the program into the TARP bill, and it never put much force behind passing it on its lonesome.
All this raises a question: If the Obama administration's housing policies have been so ineffective and poorly executed, why don't more Republicans make this critique?
The answer is that the politics of housing are so bad that Republicans have largely chosen to steer clear of the issue. Mitt Romney, for instance, doesn't have a specific housing plan, much less a plan for debt forgiveness. He began the campaign by counseling, “don’t try to stop the foreclosure process. Let it run its course and hit the bottom.” Then he reversed himself, saying instead, "the idea that somehow this is going to cure itself by itself is probably not real." But he hasn't endorsed any specific policy measures on the subject, which makes it hard for him to criticize Obama. After all, it's tough to say the other guy made a mistake by not pursuing debt relief when you also don't want to pursue debt relief.
But to some degree, it doesn't much matter if Romney can make this case. The problem for the Obama administration is that the continued weakness of the economy makes it for him.