AG Urges Principal Forgiveness

The Boston Globe published the story AG Urges Principal Forgiveness. (You may not be able to read the whole thing if you are not a Globe subscriber. The important stuff is right here, so don’t worry about subscribing to the Globe.)

Massachusetts Attorney General Martha Coakley today said mortgage giants Freddie Mac and Fannie Mae should do more to stop “unnecessary foreclosures,” including by reducing loan principal for homeowners who are having difficulty making their monthly payments.
Melonie Griffiths, an organizer with the Jamaica Plain housing advocacy group City Life/Vida Urbana, said that even if taxpayers lose money when Fannie and Freddie reduce principal for needy homeowners, they will lose even more if the housing crisis is not resolved.

“It is one of the things that is going to get the economy back on track,’’ she said.

This is the one big idea that the Obama administration should have been pushing from the very beginning.  They spent trillions of dollars bailing out the banks which did nothing to get the economy moving again.  If they had used the same money to reduce principal on the loans, the housing sector and the consumer purchasing power would have recovered much more quickly.

I am sure the argument was that the banks would eventually pay back the loans, but the reduction of principal would be permanent.  The government would not be repaid for the money spent reducing principal.  However, as Melonie Griffiths points out, the payback to the government would not have been directly from the mortgagees, but it would come indirectly through a revived economy that would increase tax revenues and cut the deficit. No mention is made of the cost of labor immobility due to homes that cannot be sold because the mortgages are underwater.  In other recessions people have been more free to sell their homes and to move to where the jobs are.

Moreover, though the banks may have paid back the principal of the money that was lent to them in the bailout, they no way repaid the less visible bailout of extremely low interest rate borrowing from the Federal Reserve.  It is funny how nobody accounts for this bailout as money spent by the Fed. Few people may realize that the profits of the Federal Reserve Bank are paid to the U.S. Treasury.

I guess it shows that people with business experience, like Mitt Romney, are so used to looking at the small picture from the viewpoint of a single business, that they cannot see the big picture of the entire economy.  You’d think that a business person might think about  the experience of running a large company where you may have one division losing money so that another division can make more and the company comes out ahead.  This is the same thing that happens for a country and its whole economy.  It applies even more to the whole world and the world economy.  There seem to be few business people who can make the connection, although the connection seems obvious to me.

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