Three Reasons We Need an Economic Wake Up Call

By Robert Kuttner, Huffington Post. Posted July 7, 2009.

Most of the stimulus money is still unspent because of various bureaucratic hurdles at all levels of government. This approach would break through all that. Washington would simply cut fifty checks.

The Foreclosure Catastrophe. When the Obama administration took office, they basically continued the Bush administration's program of voluntary loan modifications. They sweetened the deal by paying banks to reduce the principal or interest, spending $75 billion for banks (money that might have gone directly to homeowners.)

But with most distressed mortgages having been converted to securities, and the banks that collect the payments not wishing to get sued, the program is mostly a bust. The Treasury says that something like 50,000 mortgages have been modified, out of several million at risk of foreclosures. Treasury keeps telling Congress to wait a few more months to let the program kick in. But according to the New York Times' indispensable Gretchen Morgenson, the program is actually going backwards. Out of a sample of 3.5 million sub-prime and alt-a (undocumented mortgages better known as "liar loans") handled by five of the nation's biggest lenders, servicers modified 23,749 in February, but only 19,041 in May and 18,179 in June. Meanwhile, foreclosures in progress are over 844,000.

The consequence of this policy failure is a continuing downward spiral of more vacant homes, continuing declines in property values and home equity, depressed home construction, and stresses on homeowners who spend every penny of disposable income to keep their houses. The government needs a Roosevelt-scale mortgage refinancing program with one goal--to keep people from losing their homes. As Morgenson reports, when a bank forecloses, it loses about 63 percent of the loan value. Wouldn't it be better to reduce the monthly payments by 63 percent, and allow people to keep their homes? But only a much more direct government intervention can do that.

Busted Banks. The Administration's policy of pumping up busted banks, such as Citigroup and Bank of America has been a success only in the sense that these zombies are still in business. But surely the right test is whether credit is flowing again to deserving borrowers. Reports from the small business and community reinvestment communities suggest that credit is still very right, despite Federal Reserve policies of cutting short term interest rates almost to zero.

I still have to pinch myself when I realize that the President of the United States is Barack Hussein Obama. Like the rest of the progressive community, my heart swells when Obama, in Egypt, makes a brilliant speech on Middle East, or accelerates the progress of redeeming full civil rights for gays and lesbians. (I could find some quibbles on these fronts as well.) But these are not the issues that will cost him his presidency if he fails to grasp that the economic recovery and the moment of reform are slipping away.

As Republican missteps turn from tragedy to farce and back again, we should not get too cocky. The Republican ticket in 2012 could be Palin-Sanford; if unemployment is 11 percent, it will win.

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Robert Kuttner is co-editor of The American Prospect.

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