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1. Bold government action staved off a Depression, saving or creating 1.5 million jobs.
“Just remember,” Treasury Secretary Tim Geithner said on November 1, 2009, “a year ago today, last year, you had markets around the world come to a stop. Economic activity just stopped, came to a standstill, like flipping a switch.”
Geithner implies that the American business climate improved substantially in the first year of the Obama administration. In fact, nearly every indicator, from employment to freight transport to rents to retail sales to real estate, has headed steadily south. In some cases, such as unemployment, the numbers have been far worse than the Obama economic team’s worst-case projections. In others, such as real estate, the weakness of the market is masked by expensive government support, including but not limited to the unkillable First-Time Homebuyer Credit, an assault on loan underwriting standards (see Lie No. 2) by the Federal Housing Authority and the government-run mortgage giants Fannie Mae and Freddie Mac, and the completely opaque $75 billion Home Affordable Modification Program (HAMP).
The $787 billion in stimulus spending authorized by the American Recovery and Reinvestment Act of 2009 is now best known for its inflated and unsupportable job creation numbers. At press time, Council of Economic Advisers Chairwoman Christina D. Romer (who, confusingly, made her academic reputation proving that fiscal stimulus did not help the U.S. economy during the Great Depression and World War II) was giving the stimulus credit for 1.5 million American jobs in 2009. All efforts at checking her claims, however, have turned up very different numbers. The Associated Press, the Boston Globe, the L.A. Weekly, and local papers around the country have failed to find actual jobs to match up with those being reported at Recovery.gov. The administration’s only concession to this reality has been rhetorical: After claiming that hundreds of thousands of jobs had been “created” early in 2009, the Council of Economic Advisers turned to the phrase “saved or created” by mid-year. In December the Obama administration again changed its measure to jobs “funded” by the stimulus.
Of all the government interventions since the start of the real estate decline, only one—the rescue effort for too-big-to-fail Wall Street players, which predates Obama—has had a measurable effect. The Troubled Asset Relief Program, the Federal Reserve’s promiscuous use of discount windows and dollar-destroying low interest rates, and the Treasury Department’s open wallet for incompetent financial institutions have cumulatively ensured the survival of the biggest, failiest financial institutions, including such devourers of the commonweal as Citigroup, which managed to lose $7.6 billion in the fourth quarter of 2009 despite an infusion of tens of billions of taxpayer dollars over the year.
2. “No one wants banks making the kinds of risky loans that got us into this situation in the first place.”
President Obama made this claim following a December meeting with big bank officials, then contradicted himself by urging bankers to take “third and fourth” looks at rejected business loan applications. But the administration has been even more enthusiastic about encouraging another type of credit: the precise risky loans that got us into this situation in the first place.
Mortgage lending standards have declined, and the amount of risky debt taxpayers are underwriting has rapidly increased, under Obama’s guidance. A 2009 audit found that the Federal Housing Authority (FHA) was failing to vet lenders, ignoring missing borrower documentation, and declining to consider negative information prior to guaranteeing loans. More important, the FHA still guarantees mortgages with a minimum down payment of only 3.5 percent, despite abundant evidence that a borrower with low equity is more likely to default than any other type of borrower. (See Lie No. 3.) Defaults on government-approved loans continue to rise, as do redefaults on mortgages refinanced under HAMP.
Undaunted, the administration wants to give unpromising borrowers greater access to debt. At press time, the Treasury Department was considering allowing borrowers to get HAMP modifications by using only pay stubs, rather than tax records, to prove their financial status.
3. The economic crisis is a “subprime crisis.”
“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited,” Federal Reserve Chairman Ben Bernanke said in May 2007, “and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
To understand how Bernanke could be so wrong on something so important (see Lie No. 4), note that the real estate bust was not a problem with self-identified “subprime” loans (mortgages that are made to borrowers with bad credit and not backed by Fannie Mae and Freddie Mac). In fact, the rapid expansion in subprime lending was a late phenomenon that occurred in the last 18 months of a decade-long real estate bubble. Subprime defaults are actually slightly below their worst-ever historic records, and the explosion of subprime defaults that began in 2005 was accompanied or slightly preceded by a statistically equal explosion in prime defaults.
How is this possible? The period going back to the mid-1990s has seen a massive increase in mortgages that look prime (and are backed by Fannie and Freddie) but in fact feature dangerously low down payments, tricky interest-only and adjustable rate mechanisms, and other inadvisable debt schemes. Late in 2008, Fannie Mae admitted in a footnote that its portfolio had for years been stuffed with alt-A, negative amortization loans, and other junk debt.
Statistically speaking, the only reliable gauge of default probability is how much equity the borrower has as a share of debt. Fannie, Freddie, the Department of Housing and Urban Development, the Federal Housing Administration, and all other federal real estate concerns have been working since the 1990s to increase the loan-to-value ratio of mortgages. They have succeeded: Americans now own a smaller percentage of their homes than at any other time in history.
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