by Bill Clinton
I think that’s the right thing to do, because the Tea Party bloc and their allies in Congress are convinced that you, the American voters, will reward them for continuing to be against everything. They’re even against the payroll tax cuts for employers and employees that President Obama has proposed to spur hiring. It’s not complicated. Saying NO keeps their contributors and base voters happy and keeps the economy weak, which advances what the Senate Republican leader, Mitch McConnell, says is their number-one priority: defeating the president in 2012. They’re convinced that you’ll punish him for what they do, or don’t do, to keep unemployment high, wages low, and poverty rising. If they’re right, they get the White House and Congress and the chance to finish what they started thirty years ago.
Of course, it doesn’t have to be that way. If the fever breaks over the next few months, Republicans and Democrats could decide, as they did in 1996, to work together on our big challenges and let the American people decide in 2012 which parties and candidates have the best ideas for the future.
Meanwhile, we need to put a lot of people to work now. I think we should start with a three-part strategy: (1) put as much of the $4 trillion now held in banks and corporate treasuries back into the economy as fast as we can; (2) concentrate on the areas most likely to produce good jobs that have a positive ripple effect, jobs in modern infrastructure building, high-end manufacturing, green technologies, and exported goods and services; and (3) do literally dozens of other things that, when combined, can make a real impact now and also increase our long-term economic growth.
In early September 2011, President Obama outlined the proposals in his American Jobs Act. It contains about $250 billion in payroll tax cuts and hiring tax credits, and $200 billion in spending to employ construction workers in modernizing schools, rehabilitating buildings, and upgrading roads, railways, and bridges; to prevent layoffs of teachers, police officers, and firefighters; and to improve unemployment and training programs. If passed, it will give the economy a needed boost. Independent economists, including Mark Zandi, chief economist of Moody’s Analytics and an adviser to Senator John McCain’s 2008 presidential campaign, say the American Jobs Act will increase GDP between 1.3 and 2 percent in 2012 and create one to two million jobs.
To do better than that, we’ll need more private-sector activity.
First, we have to get money flowing. Recessions created by financial crashes usually take much longer to get over, five to ten years or more, than business-cycle recessions, because banks are reluctant to lend, businesses are reluctant to borrow, corporations are reluctant to hire, and consumers are reluctant to spend. The good news is that, like Willie Sutton, we know where the money is in our distressed economy. And there’s lots of it. Banks have more than $2 trillion in cash reserves uncommitted to loans. And businesses of all sizes have about that much uncommitted to investment. Just three big banks, Citigroup, JPMorgan Chase, and Wells Fargo, have in total more than $1 trillion in cash. The top twenty nonbank corporations, companies like GE, Microsoft, Google, Apple, Johnson & Johnson, Coca-Cola, ExxonMobil, Walmart, and Procter & Gamble, have about $350 billion.
Since banks can lend, conservatively, $10 for every dollar they hold in reserves, U.S. banks have the capacity, in theory, to end the entire global recession. Companies could invest their cash in new products that would increase hiring today or in research and development that would increase employment today and even more in the future. Unfortunately, banks are reluctant to lend, and loan demand is weak. As for the big companies, many executives have decided, at least for now, not to invest in future growth but to buy back their stock instead, increasing earnings per share and, in the process, earning bigger bonuses for top management, once again widening the gap between themselves and their own employees and doing nothing to put America back to work.
The rest of this chapter presents a set of proposals to increase bank lending and corporate investment, to create more jobs that pay well, and to make sure we have enough people trained to fill them. Several of these proposals are included in the president’s American Jobs Act, which contains other good ideas as well. Right now, the United States needs all the good ideas we can get. If you disagree with any of these proposals, or if you’ve got a better idea, I invite you to share your ideas on social media platforms using the hashtag #backtowork.
NOW, BACK TO BUSINESS. What can we do to unlock the money?
1. End the mortgage mess as quickly as possible. Even though banks have off-loaded most of their mortgages to Fannie Mae and Freddie Mac, they still hold some nonperforming ones, under $200 billion worth, for which they have to keep cash in reserve. They’ve still got plenty of unencumbered cash reserves, but they remain reluctant to lend, because the continuing mortgage failures are glutting the market with empty houses, keeping the housing market depressed, and holding down the entire economy. Seventy-five percent of household debt, still high at more than 110 percent of disposable income, is mortgage debt, with more than 25 percent of American homes now worth less than their mortgages.
The debt overhang of financial crashes is the main reason they normally take five years or more to get over, rather than the one-year or shorter recovery period for the typical recession. Large lingering debt is a big reason the stimulus program kept us from falling into a full depression but couldn’t lift us into a full recovery.
A rapid, comprehensive effort to resolve the ongoing mortgage crisis would have four benefits. It would clean up bank balance sheets, freeing them up to lend; reduce the severe economic stress on millions of consumers, allowing more of their incomes to be spent for normal consumption; turn empty houses now depressing the market into properly maintained rental properties; and create a lot of jobs in preparing already foreclosed-on houses to be rented out.
To do that, we need a program that is simple and more accessible than the administration’s current modification program, HAMP. It has helped a lot of people, almost one million, but not enough. The initiative to encourage mortgage write-downs to the value of the home has helped far fewer. Ideally, the program would have these components:
a) Every delinquent homeowner whose mortgage is worth more than the house should have the mortgage principal written down or its term extended at a low interest rate, if doing so would enable the homeowner to make the smaller payments. If over the life of the mortgage or at an earlier sale the value of the home goes up again and it is sold at a profit, the owner should share the profit with the lender. Ocwen Loan Servicing, based in Atlanta, is already offering shared appreciation plans.
b) The borrowers who can’t make even the reduced payments should be given the option of swapping their deed for a multiyear lease, with modest rental payments sufficient to cover taxes, insurance, and maintenance, and the option to buy the home back at market value when the lease expires, or earlier, if the borrower’s financial circumstances permit. Congress has been debating this option since 2008. It should be done now. And it won’t add to the budget deficit.
Harvard University economist Kenneth Rogoff has suggested a variation on this approach. Rather than have the homeowner become a renter, Rogoff recommends letting the bank convert a portion of the mortgage into an equity investment, thus reducing the homeowner’s monthly payments to an affordable level without reducing the obligation of the homeowner to pay off the debt by reconverting the bank’s ownership interest back into mortgage payments when circumstances improve. As governor of Arkansas, I proposed and the Arkansas legislature passed a mechanism similar to Rogoff’s for state-chartered bank loans to troubled farmers. The state banks didn’t want to foreclose on farmers but didn’t want bank regulators to cite them for holding too much bad debt. Our bill allowed them to convert the debt into partial ownership of the farms. A farmer who avoided foreclosure had the right to turn the bank’s equity position back into debt as soon as he could make the payments. Rogoff’s idea could work.
c) If neither option works for the homeowner, then foreclosure should be exped
ited, coupled with assistance in finding an affordable rental option.
d) Meanwhile, the government should incentivize banks, as holders and servicers of mortgages, along with Fannie Mae, Freddie Mac, the VA, and the Federal Housing Administration (FHA), to get their housing stock into rentable shape and to charge the lowest possible rates so that the houses can be filled more quickly and don’t deteriorate further. This is much better than allowing Fannie and Freddie to continue to dump thousands of foreclosed-on houses onto the market each month, further depressing housing prices and the value of occupied homes.
e) If we want to create even more jobs with this effort, the houses to be rented should be given energy audits and retrofits. Typically, utility savings of 20 percent or more can be achieved with just one day of retrofit work by knowledgeable contractors. Though the utility bills will go down, the renters would continue to pay the same rent until the cost of the retrofit is paid off, usually in twelve to eighteen months. Then the rent payment would be reduced to reflect the 20 percent reduction in the utility bill. Meanwhile, every $1 billion spent on home retrofits creates about eight thousand jobs. The banks could finance the retrofits at little or no risk because bonded contractors will guarantee the savings to get the work. Or the Treasury Department could finance them with money from the unspent TARP funds allocated to the mortgage problem. I believe the total is more than $40 billion. Like the banks, the government would get the money back plus interest.
So why aren’t we doing this already? A number of news articles I’ve read recently suggest that banks are reluctant to write down mortgages because they make more money on foreclosures. The bankers I’ve talked to about this say it isn’t so, because the costs of maintaining foreclosed property are greater than the foreclosure fees.
It seems to me there are three obstacles to rapid, comprehensive resolution of the problem.
First, the public entities that hold mortgages, the VA and the FHA, often don’t allow principal reduction, even when doing so would have a positive economic impact. The publicly created big mortgage holders, Fannie Mae and Freddie Mac, don’t either, even though they received more than $140 billion from the government to help them survive after they made large purchases of subprime mortgages from 2004 through 2007. One recent news article, based on Fannie Mae’s own records, claims Fannie spent $27,000 to foreclose on one home with a delinquency of only $3,000.
Why are they doing this?
When Freddie and Fannie got their bailouts, Congress put them under the supervision of the Federal Housing Finance Agency. Its interim director, Edward DeMarco, says his mission is to conserve Fannie’s and Freddie’s assets, not to restore the health of the housing market. Given a narrow interpretation of his legislative mandate, he may be right. He’s been defended by Sheila Bair, former director of the Federal Deposit Insurance Corporation, who did more than any other Bush administration official to warn of, and try to fend off, the crash, and has made constructive proposals to fix it. Still, the problem with DeMarco’s position is that in opposing writing down mortgages or refinancing them at lower interest rates, he may save Fannie Mae and Freddie Mac money today, but not in the long run, because until we resolve the underlying problem the value of housing stock will continue to decrease, making even more mortgages valued higher than homes. Something has to be done to change this.
Fannie Mae, Freddie Mac, the VA, and the FHA shouldn’t be blocking mortgage modifications or pushing for foreclosures on modest delinquencies. According to Bank of America, of the millions of delinquent mortgages it services, 60 percent are held by Fannie Mae and Freddie Mac, 20 percent by the VA and the FHA. They have to be on board to make this work.
The second problem is that there’s no single authority with the power to institute and accelerate this process. The states’ attorneys general are trying to reach a comprehensive settlement over the mistakes made by mortgage issuers. Even if they do, the foreclosure process is different from state to state. If a delinquent homeowner decides to fight foreclosure with every available option, the process can take from two to eight years. And as yet, the bankers that service the mortgages and the entities that own them haven’t reached agreement on clear standards for mortgage modifications or workable foreclosures.
The U.S. Treasury Department is trying to broker a comprehensive settlement covering all the states and all the mortgage servicers and owners. In the Bank of America case, the investors who sued the bank to recover their investments in overvalued mortgages agreed, in return for $8.5 billion in compensation from Bank of America, to allow a court to resolve all the questions regarding individual cases in a transparent process. Any settlement involving the states, the mortgage owners, and the servicers needs to have a similar effective, open, and timely process to resolve these questions. Prolonged delays might help some homeowners, but they won’t eliminate the serious drag of all the debt on the entire economy soon enough.
The third problem is that many Americans who didn’t take out risky mortgages and are making their payments every month don’t think it’s fair to modify the mortgages of people who shouldn’t have taken them out in the first place and should face the consequences of their mistakes.
That’s a defensible position that in normal times should govern our policy. But it shouldn’t control our actions today. Why? Because the housing market collapse has hurt the entire economy so much that a lot of people who can’t make mortgage payments today were reasonable in thinking they’d never default when they signed the mortgage papers. Because every foreclosure punishes more people than the imprudent borrower, it drives down the prices of all the houses in the neighborhood. And because now so many homes have been foreclosed on, or are about to be, the total impact has depressed overall housing values, shrinking the biggest source of family wealth for millions of innocent bystanders. The over 25 percent of mortgages now worth more than their homes’ value include many on which payments are not delinquent. And if they’re written down on terms that require the owner to share future profits with the lender if the house rises in value, the so-called moral hazard argument has much less force.
We can’t put people back to work in an economy where consumers spend less, banks don’t lend, businesses don’t borrow, state and local governments reduce employment and support for schools, and the federal government is cutting back too. The mortgage problem is freezing us in place.
Under these circumstances, opposing mortgage modifications because some people don’t deserve them is cutting off our nose to spite our face. It reminds me of the old Cajun story of Ramon, who liked to carry expensive cigars in the front pocket of his coat. One day his friend Pierre noticed that he had replaced the cigars with sticks of dynamite. When he asked why, Ramon replied, “You know that no-good Jacques? Every time I see him, he says hello, then slaps me in the chest and destroys my good cigars. I’ll show him.” Pierre said, “But, Ramon, if the dynamite explodes, it’ll kill you.” Ramon said, “I know that, but I’ll blow his damn hand off too!” Requiring all delinquent homeowners to face the full consequences of their mortgages is a luxury we can’t afford. All the rest of us are getting hurt too.
While all the ideas that follow will create jobs and increase growth, it’s going to be very hard to return to full employment and rising incomes unless we reduce the debt overhang of the mortgage crisis. We need to clear it up as soon as possible.
2. Let people with government-guaranteed mortgages who aren’t delinquent refinance their mortgages at the current low interest rate. This step would help the economy with a multiyear stimulus that doesn’t cost the taxpayers anything. Home mortgage rates are now down to 4 percent. Fewer than one million people have taken advantage of the government’s Home Affordable Refinance Program (HARP). But there are more than twenty-two million homeowners who are current on government-backed mortgages with an average valuation of $150,000 and an average interest rate of 5.6 percent. There is widespread criticism that refinancing fees for the loans backed by Fannie Mae a
nd Freddie Mac are excessive, especially for borrowers without perfect credit ratings. In some cases the fees may be so significant that they essentially eliminate the benefits. The assumption is that government servicers have instituted the fees because they are against refinancing, which would hurt their cash flow. Professor Glenn Hubbard and his colleagues have suggested creating a simplified process, applying a flat 4⁄10 of 1 percent fee for refinancing any fully performing loan that Fannie or Freddie guarantees. The flat fee is higher than such fees have historically been but less than they are charging currently, and still provides some compensation for the lower income the new loans will generate.
If even half of the twenty-two-plus million homes were refinanced at 4 percent, the average family’s mortgage payment would drop $2,500 a year, putting close to $30 billion a year into the pockets of middle-class families, reducing the rates of foreclosure, and substantially increasing the money families can spend to help get the economy going again. This is a benefit millions of responsible Americans could receive that would help us all. On the other hand, without refinancing, if even one million of the homeowners default—less than 5 percent—the foreclosure costs would be about $90 billion. Shutting them out of the current lower interest rates just doesn’t make sense.
3. The Federal Reserve should give the banks an incentive to lend. Another thing that might increase bank lending is to adopt an idea that is working for Sweden. Currently, because interest rates are low and banks are reluctant to lend, they keep a lot of cash on deposit with the Federal Reserve, at no cost. When the crash occurred, Sweden’s manufacturing sector took a terrible beating. Sweden was in a better position than the United States to deal with it, in part because the government had a large budget surplus of 3.6 percent of GDP. However, like their U.S. counterparts, Swedish banks had plenty of capital but were reluctant to lend and so deposited a lot of the money with the central bank. To encourage bank lending, the central bank began charging Swedish banks a small fee, a quarter of 1 percent, to hold their money. Now Sweden is growing at about 5.5 percent, much faster than the United States. One reason is the more rapid resumption of bank lending. If the Fed imposed even a modest fee of one-fourth of 1 percent on bank deposits it holds, the banks might be more willing to lend so they could make, not lose, money on the cash they have. It’s worth a try.