Sheila Bair has been making the media rounds lately in support of her new book, chronicling her experience as FDIC chief during the financial crisis.
Her basic argument is: Tim Geithner & Co. were primarily focused on bailing out banks, and they didn’t think at all about helping homeowners or cleaning up bank balance sheets, and making bondholders pay.
The line is half-correct.
The part that’s wrong is where she talks about cleaning up bank balance sheets. It’s nice from a moralistic perspective to talk about haircuts and pain and everything, but this wouldn’t have helped the economy. As we explained on Monday, countries that gave banks a carte-blanche bailout have seen better economic performance than those countries which tried to “clean up” the banks with haircuts and nationalizations. Furthermore, it doesn’t make logical sense to think that bank balance sheet problems have hurt the economy, given that the lack of lending has been mostly a demand-side phenomenon.
But Bair does home in on the administration’s biggest flop.
On CNBC yesterday, Bair talked about the administrations’ half-hearted efforts to provide relief to struggling homeowners…
“What I think what was going on was… to get the second tranche of the TARP funds, to get that second instalment , the Democratic leadership told them they had to have some kind of foreclosure prevention program.”
That’s a pretty damning statement, and it reflects a fact that others have observed, which is that the one big failure of Obama on economic policy has been the administration’s lack of aggressiveness to do anything on housing.
Binyamin Appelbaum wrote about this in the New York Times back in August:
But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favour of a limited aid program — and a bet that a recovering economy would take care of the rest.
During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.
The nation’s painfully slow pace of growth is now the primary threat to Mr. Obama’s bid for a second term, and some economists and political allies say the cautious response to the housing crisis was the administration’s most significant mistake. The bailouts of banks and automakers are now widely regarded as crucial steps in arresting the recession, while the depressed housing market remains a millstone.
Richard Koo has done a great job comparing the US balance sheet recession with Japan’s post-bubble environment, and from his work there’s a lot to learn about the power of fiscal policy to address the aftermath of a credit bubble.
The key difference, however, between the US and Japan experiences has been: who has all the debt.
In Japan, it was corporates that were swamped by too much debt pre-crisis, and an ongoing collapse in asset values. For the US it has been housing that (up until very recently) has been a worsening drag on the private sector, depressing the economy in a wide range of ways.
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