Welcome to DU!
The truly grassroots left-of-center political community where regular people, not algorithms, drive the discussions and set the standards.
Join the community:
Create a free account
Support DU (and get rid of ads!):
Become a Star Member
Latest Breaking News
General Discussion
The DU Lounge
All Forums
Issue Forums
Culture Forums
Alliance Forums
Region Forums
Support Forums
Help & Search
Larry Summers: Helping Homeowners Would Have Hurt Banks
I have a review of Mian and Sufi’s House of Debt out today, and so does Larry Summers. His review is very strange. It starts off with almost unvarnished praise for the book, saying “it could be the most important book to come out of the 2008 financial crisis and subsequent Great Recession.” He celebrates their data collection, largely agrees with their alternative rendering of the causes of the crisis, and pronounces it “a major contribution” that should give pause to what Mian and Sufi call “the banking view” of the crisis, essentially that the economy hinges on protecting and saving the financial system.
And then, Summers calls them naive and says they didn’t understand the reality of what policymakers faced in 2008 and 2009. Specifically, he says that “We all believed in 2009 what Mian and Sufi have now conclusively demonstrated – that reducing mortgage debt would spur consumer spending,” saying they did not have a narrow banking view of crisis response. Yet almost every one of Summers’ objections - to supporting bankruptcy judges rewriting terms of primary mortgages, to forcing principal write-downs, to buying underwater mortgages through a Home Owners Loan Corporation-type structure - comes with the warning that the preferred policy of mortgage debt relief would hurt the banks.
...
How does this not reflect a “banking view” of the world? The objections are that relieving homeowner debt would put losses on banks, chill future lending and hurt banks’ capital positions. This is precisely what Mian and Sufi attack in the book! First off, they argue that it makes no sense to want to spur lending into a deeply indebted economy. They also add that “The idea that financial firms should never take losses is indefensible.” Their entire point is that the losses from the housing bubble collapse were poorly distributed through the system, heaped on those who lost the most in net worth and had the highest marginal propensity to spend. Meanwhile, those most equipped to absorb the losses, those who finance the banking system, were relatively untouched. This is the PRECISE CAUSE, in Mian and Sufi’s view, why the recovery has been so sluggish: the families who couldn’t withstand heavy losses took the brunt of them, and they had to cut back, and demand suffered.
It’s extremely weird that Summers says House of Debt should inform policy responses, and then gives all the reasons why it can’t inform the last policy response. Summers is effectively saying, “We didn’t have a banking view! It’s just that mortgage debt relief would hurt the banks.” In a way, that is nicely revealing. People long suspected that the White House economic team’s policy response foregrounded the idea of protecting the banks at all costs, with homeowners a secondary concern at best. Summers just said it out loud.
http://daviddayen.tumblr.com/post/88000474571/summers-helping-homeowners-would-have-hurt-banks
And then, Summers calls them naive and says they didn’t understand the reality of what policymakers faced in 2008 and 2009. Specifically, he says that “We all believed in 2009 what Mian and Sufi have now conclusively demonstrated – that reducing mortgage debt would spur consumer spending,” saying they did not have a narrow banking view of crisis response. Yet almost every one of Summers’ objections - to supporting bankruptcy judges rewriting terms of primary mortgages, to forcing principal write-downs, to buying underwater mortgages through a Home Owners Loan Corporation-type structure - comes with the warning that the preferred policy of mortgage debt relief would hurt the banks.
...
How does this not reflect a “banking view” of the world? The objections are that relieving homeowner debt would put losses on banks, chill future lending and hurt banks’ capital positions. This is precisely what Mian and Sufi attack in the book! First off, they argue that it makes no sense to want to spur lending into a deeply indebted economy. They also add that “The idea that financial firms should never take losses is indefensible.” Their entire point is that the losses from the housing bubble collapse were poorly distributed through the system, heaped on those who lost the most in net worth and had the highest marginal propensity to spend. Meanwhile, those most equipped to absorb the losses, those who finance the banking system, were relatively untouched. This is the PRECISE CAUSE, in Mian and Sufi’s view, why the recovery has been so sluggish: the families who couldn’t withstand heavy losses took the brunt of them, and they had to cut back, and demand suffered.
It’s extremely weird that Summers says House of Debt should inform policy responses, and then gives all the reasons why it can’t inform the last policy response. Summers is effectively saying, “We didn’t have a banking view! It’s just that mortgage debt relief would hurt the banks.” In a way, that is nicely revealing. People long suspected that the White House economic team’s policy response foregrounded the idea of protecting the banks at all costs, with homeowners a secondary concern at best. Summers just said it out loud.
http://daviddayen.tumblr.com/post/88000474571/summers-helping-homeowners-would-have-hurt-banks
37 replies
= new reply since forum marked as read
= new reply since forum marked as read
Just because big banks caused the crisis, doesn't mean they should shoulder the responsibility for it.
Why can't you all just look forward?
