Did Washington Rescue the Wrong Economy?

Richard Eskow

Economists Atif Mian and Amir Sufi recently wrote an editorial for The Washington Post headlined “Why Tim Geithner is wrong on homeowner debt relief.” Using data and arguments from their upcoming book “House of Debt,” Mian and Sufi essentially argue that former Treasury Secretary Timothy Geithner’s recent public statements got the bailout exactly backwards. Geithner has argued that rescuing homeowners who were left underwater after the 2008 financial crisis wasn’t worth the effort, and that rescuing the banking system was our most urgent priority.

Binyamin Appelbaum of the New York Times interviewed Sufi and Mian, as well as a number of other economists, for a profile entitled “The Case Against the Bernanke-Obama Financial Rescue.” Their position is the same in both cases, of course, and in essence it’s a simple one: After exhaustive research, Sufi and Mian have concluded that long-term economic damage was not an inevitable outcome of the 2008 financial crisis. Instead, it’s the result of a bailout plan that focused on the wrong segments of the economy.

Specifically, Sufi and Mian believe that the 2009 crisis wouldn’t have been any more harmful than other recessions of recent decades if financial decision-makers had rescued homeowners, rather than only concentrating on bankers. Financial institutions needed to be rescued, but they conclude that aid to homeowners – specifically, mortgage write-downs – were needed to get the economy back on track.

This argument is closely tied to the idea that we now have two economies. One is for the financial sector, an expanding category which is disconnected from job-producing ventures (and whose rapid-payback, profit-churning mentality is increasingly dominating the management of other industries). The other is the “real world” economy – the one in which people do real work in order to produce real goods and services, and then use their income to purchase those goods and services.

In retrospect, President Obama himself declared his opposition to the “Two Economies” idea when he pitched his financial reform proposals to corporate leaders in April 2010. In a speech at New York’s Cooper Union, Obama said that “”there is no dividing line between Main Street and Wall Street … we rise or fall together as one nation.”

That is precisely the formulation which the work of Sufi and Mian contradicts. Their Post editorial offers a thorough overview of their technical argument, while the Times piece outlines it in layperson’s language. One of their key insights is that helping middle-class homeowners is even more economically advantageous than past studies have suggested. Borrower relief has an even greater stimulus effect than originally thought – if it is targeted towards non-wealthy homeowners. Wealthier homeowners are less likely to spend money when offered debt relief.

Needless to say, these economic arguments are compelling in and of themselves. But the moral arguments for rescuing underwater homeowners make the most compelling case of all. The bankers who were rescued by the United States government – that is, by the American taxpayer, including many of those homeowners – are the same people who misled homeowners into thinking a house was a good investment, then bundled their mortgages and sold them at bubble prices, enriching themselves and often committing egregious acts of fraud in the process.

The bankers got rescued. The homeowners didn’t. As Sufi and Mian conclude in their Post editorial: “The fact that Secretary Geithner and the Obama administration did not push for debt write-downs more aggressively remains the biggest policy mistake of the Great Recession.”

Amir Sufi and Atif Mian have been publishing important work on this topic for the last eight years, beginning well before the 2008 crisis. Their arguments are compelling and deserve widespread attention, especially at a time when Tim Geithner and others are trying to rewrite history – and when many homeowners still need help.

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