It has been a big week. Since last summer, economic policy and markets have been frozen in anticipation of recovery. This period of apparent stability has been an illusion, with tension building, and markets and politics have begun disorderly moves to catch up.
Stocks have cracked, which should have helped mortgage rates, but the aid has been intercepted by onrushing Treasury borrowing. Mortgages are stuck above 5 percent.
The economics of the moment are the easy part. There is no recovery worthy of the name, especially in jobs. Housing in half the country is in deep trouble. We are living on Treasury borrowing that must slow, but we dare not. The administration has no functioning plan for economic recovery, and average citizens are mightily annoyed.
The political consequences … holy smokes. First the ricochets and collateral damage, then one bright light of effective action — at the Federal Housing Administration of all places.
Coverage of the Massachusetts upset has focused on partisan triumph and consequences to health care reform. Wrong and wrong. Voters for Republican Senator-elect Scott Brown were asked: Was the economy the key to your vote for Brown? Yes. Nine to one.
During the last many immobile months in the White House a quiet coup took place. The do-nothing Larry Summers-Tim Geithner axis has been replaced by the David Axelrod-Paul Volcker populist-and-punish front.
At first I thought this week’s announcements of taxes on banks and break-’em-up plans were political ploys to get out in front of national anger and health care failure.
No such luck. The White House thinks the plans are good policy. Warren Buffet denounced the tax plan within hours as the idiocy that it is. Banks already pay heavy fees to replenish the Federal Deposit Insurance Corp. after their fellows’ disasters; yanking more capital would mean fewer loans, and we must have loans to get out of this.
Volcker was easily the most punishing Fed chairman ever (he created the worst post-war recession previous to this to break the back of inflation), but his world is long gone. This whole "too-big-to-fail" argument is mistaken.
If all of America’s top 20 banks were half their 2007 size, nothing in this disaster would have been different. We suffered a systemic failure. In dominoes, size doesn’t matter. …CONTINUED
Threatening to bust up the banks may buy a pause in the national gathering of tar and feathers, but not for long. Recovery, damn it. Focus on recovery, not retribution.
The political breakdown has immobilized the Fed, the only part of government to rise to the crisis. A bipartisan mob in Congress has decided: Since the Fed has been doing lots of things, they must have been the wrong things. Stop them. Forever.
Under attack, the Fed has already begun to withdraw, specifically to end its direct purchases of Treasurys, agency debt and mortgage-backed securities. No political cover, no Fed. Like 2008: criticized for its Bear Stearns firebreak, next time … let Lehman go.
Just when faith in good government seemed a lost hope, FHA Commissioner David Stevens provided an example to all the bumblers and mobs. Under great pressure to tighten loan standards beyond anything in its 74-year history (in the name of prudence, thereby choking off the last support for housing), Stevens left loan criteria alone, raised some revenue, and tightened standards a different way.
He will publicly expose lenders making too many bad loans. He will hold them accountable. If they continue to misbehave, he will put them out of business.
What a concept. Instead of one-size regulatory paralysis, he will focus on the bad guys. Make it personal. Name names. When President Obama took office, he expressed disinterest in the size of government in favor of government "that works."
Could we try that, please, on banks and Wall Street? Put the whole system in capital forbearance and form long-term recapitalization plans under consent decree. Make good loans and assure recovery. Misbehave and we will remove you.
During recovery, make plans for future systemic soundness; no experimental axe-work until then.
There is more than one way to quiet an angry nation.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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