Very good Larry Summers FT review of Mian and Sufi

It is here, he mostly really likes the book but thinks they are not sophisticated enough in their policy prescriptions.  Here is one good excerpt on whether the federal government should have worked harder to institute mortgage cramdowns:

First, there was the risk of bringing down the system in an effort to save it. Banks had substantial mortgage holdings and especially large quantities of subordinated second mortgages and home equity lines of credit, which would have been wiped out if mortgage principal had been reduced in a way that respected the seniority of first mortgages. We recognised that large-scale principal reduction would draw in a large number of mortgages that were not delinquent and would otherwise be paid in full. As a consequence, there was the risk of sucking hundreds of billions of dollars out of the banking system. Given that government funds for capital infusions were scarce and that each dollar of bank capital supports $12 of lending, we worried that the spending gains from reducing mortgage debt might well be exceeded by the spending losses from reducing the flow of capital. This fear may have been exaggerated. If they think so, Mian and Sufi owe an explanation as to why.

Second, there was the issue of chilling future lending… This was not a small concern, as the automobile industry was in freefall and consumer confidence was deteriorating very rapidly.

Third, there was the danger of prolonging the housing market’s problems. Even the relatively limited programmes in place have spent as much as a third of their money delaying, rather than avoiding, foreclosures. All that we heard at the time suggested that a significant part of the reason why the housing market was dead was that no one wanted to buy because of a fear that it had further to fall. Delaying inevitable foreclosures with relief risked exacerbating this problem and risked larger foreclosure discounts when houses were ultimately sold.


This from a guy who, in the midst of the 2009 crisis, argued for putting in those delay restrictions to prevent banks from foreclosing, which only prolonged the recovery in housing and finance: a solution that is simple, obvious, but counterproductive. Houses now exist in limbo for an extra year, during which time it depreciates rapidly and no income or use is generated. Of course, he didn't intend that, but such are unsophisticated remedies.

Yes. I find it remarkable when one's actions conflict with what they know to be true. Of course Larry was not the decision maker and only one of many advisors. It makes me wonder about the limits of loyalty. Perhaps these hearings should be public.

Yeah, right, the banks would have been hurt by cramdowns because that would have consumed all capital, but by foreclosing and selling at below principle and consuming capital, or instead holding onto the foreclosed property which sat idle and unoccupied and thus easy target for stripping and becoming a liability to all.

The banks ended up with lots of keys mailed to them after the borrowers pleaded for any way out, from payment reducing refi to cramdowns to short sales, so the banks had ample opportunity to quickly foreclose and resell in many places to clear their books of bad mortgages, but the banks refused because the foreclosure on all those mortgages would have made the bank insolvent. Insolvent banks are taken over by the government if a FDIC bank, or liquidated or other institutions forced into insolvency by a government technocrat (Federal bankruptcy judge) redistributing wealth from lenders to the borrowers who consumed things they could not afford some years in the past.

The government from 2008 onward was going to be picking winners and losers, and I find it rather blind that conservatives who argue for no government intervention call for bankruptcy as preferable to picking winners and losers and redistributing wealth. But what would a bankruptcy judge do if I had "deposits" in a money market fund that held bonds backed by bad mortgages created by Countrywide and Goldman Sachs - he would give part or all of my money to the borrower who failed to repay the debt secured by the inflated price of an asset that was used to refi and go shopping or on vacation, or perhaps used to struggle to survive the loss of a $50K factory job with health benefits and stuck supporting a family on a $15K Walmart job plus two $10K McD's jobs to pay living and medical bills.

The Constitution gives Congress the power to redistribute wealth through bankruptcy. Odd that conservatives love it when they see redistribution of wealth as leftist.

The free market solution would allow me to take possession of the deadbeat and liquidate him. If I could sell his body parts in a free market, I might recover my money, $100K for his heart, $250K for his lungs and heart, $50K for each hand. $25K for his face....

When you put your money in the shadow banking sector you shouldn't get to go crying to the government when you lose it. There's a reason they pay a higher interest rate.

Whenever banks had the ability to seize an asset and write it down, it would; most houses lost a lot less value than the mortgages attached to them. If you think otherwise, you are simply wrong.

Of course, everything Summers says about housing is true, but the same could be said about securities; indeed, by stopping the free fall in the value of securities, the already high level of inequality was preserved (the 1% own securities and had the most to lose if the government and central bank had not intervened stopped the free fall in the value of securities). The biggest difference in housing and securities (besides who owns them) is that there's an organized market for one and not for the other, making intervention extremely complex for one and less so for the other. And let's not forget Summers' explanation (in his Okun Lecture) for the crisis as it was unfolding: too little vigilance on the part of the Fed to spot and check lurking inflation that was hiding behind the benign statistics. Maybe it's unfair to fault Summers for expressing views as the crisis was unfolding when he didn't have the benefit of hindsight, but hindsight is exactly what regulators don't have in a crisis. Indeed, another crisis is most likely coming, yet I don't read or hear much as to what to do when it comes.

Actually, the 1% own much more than securities. Warren Buffetts primary asset is Berkshire Hathaway which owns a large diverse portfolio of firms that are valued primarily by their productive capital assets. His share of his asset is defined by his shared of the securities, but he is in control. Ditto for Bill Gates, et al, and for Ford and Rockefeller a century back.

The majority of those who get screwed by liquidating bad debt are in the 99%. For every one of the 1% holding a security that is illiquid, probably 50 of the 99% hold it, just much less of a portion of the security, but that security means much more to them.

I'm not clear what "cramdown proposal" Summers is commenting on, but the only one which seems to me that would have worked would have been one in which the federal government bought out the extent of the homeowner's underwater indebtedness. An involuntary cramdown, where the banks were forced to realize losses on mortgages at an arbitrary point in time was going to create a "takings" issue and no doubt require something akin to a bankruptcy-style proceeding to value the property and the debtor's ability to pay.

Banks über alles. Keep that in mind and every proposal that Summers and Geithner made and fought for makes perfect sense.

The final paragraph you excerpted is pure Mellonite liquidationism. Not surprising to see it highlighted and praised in a house full of crazies like this one, but compromised though Summers is, I never thought I'd hear him say THAT.

When housing prices crashed, someone's wealth was not going to be as large as they thought it was. Somebody's demand was going to contract. Mian and Sufi think that somehow reallocating that hit would have ameliorated the impact on demand, for some reason.

But isn't the whole point of Keynes, that a decline in demand doesn't have to result in a decline in output or employment? Wouldn't it be better to work on that?

Mian & Sufi layout the overwhelming evidence identying the elements of a Hayekian boom and bust cycle -- and no one notices.

image if two biologists laid out every element of an episode of speciation by national selection -- and no noticed the Darwinian mechanism at work.

Aren't economists precious.


Larry Summers lacks credibility. He campaigned for the Fed chair job so hard that he disrupted the Establishment consensus for Janet Yellen. That uncertainty contributes to systemic instability in a time when every major financial institution is stressed.

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