Top Economists Told Obama that Economic Recovery Required a Reduction In Private Debt

But Obama and His Economic Team Chose the Big Banks Instead

We’ve extensively documented that too much private household debt is killing our economy.

While Ben Bernanke and other economists who are running our economic policy literally believe that the amount of private debt doesn’t matter and isn’t even important to quantify, economists at the “central banks’ central bank” – the Bank of International Settlements – and many other leading economists say that  high levels of private debt create a tremendous drag on the economy.

And Obama can’t plead ignorance.

Business Insider notes today:

A number of economists privately told Obama that his recovery policies were weak in one key area: They didn’t do enough to address the mountain of homeowner debt.

The Washington Post reported yesterday:

One year and one month before President Obama won reelection, he invited seven of the world’s top economists to a private meeting in the Oval Office to hear their advice on what do to fix the ailing economy. “I’m not asking you to consider the political feasibility of things,” he told them in the previously unreported meeting.

There was a former Federal Reserve vice chairman, a Nobel laureate, one of the world’s foremost experts on financial crises and the chief economist of the International Monetary Fund , among others. Nearly all said Obama should introduce a much bigger plan to forgive part of the mortgage debt owed by millions of homeowners who are underwater on their properties.

***

[The Obama administration pooh-poohed the need to reduce homeowner debt.] The meeting highlighted what today is the biggest disagreement between some of the world’s top economists and the Obama administration. The economists say the president could have significantly accelerated the slow economic recovery if he had better addressed the overhang of mortgage debt left when housing prices collapsed. Obama’s advisers say that they did all they could on the housing front and that other factors better explain why the recovery has been sluggish.

***

Former budget director Peter Orszag has said that “a major policy error” was made. And Christina D. Romer, formerly Obama’s top economist, has said that the driving ideas “may have been too limited” and that there needs to be a bigger focus on reducing mortgage debt — a process known as “principal reduction.”

“The new evidence on the importance of household debt has convinced me that we are likely going to need to help homeowners who are underwater,” she said last month. “Many of these troubled loans will need to be renegotiated and the principal reduced if we are going to truly stabilize house prices and get a robust recovery going.”

***

Atif Mian, now a Princeton professor, came to focus on how finance can destabilize an economy. He saw how foreign money had flooded Latin America in the 1980s and Southeast Asia in the 1990s, leading to borrowing booms and financial crises.

Not long before the U.S. recession, Mian and another young economist, Amir Sufi of the University of Chicago’s business school, saw a similar trend here. “The common link to the emerging market crises,” Mian said, “is that it all starts with leverage.”

The two economists compared what happened in U.S. counties where people had amassed huge debts with those where people had borrowed little. It had long been thought that when property values declined in value, homeowners would spend less because they would feel less wealthy.

But Mian and Sufi’s research showed something more specific and powerful at work: People who owed huge debts when their home values declined cut back dramatically on buying cars, appliances, furniture and groceries. The more they owed, the less they spent. People with little debt hardly slowed spending at all.

***

Historically, Sufi said, “places that have bigger recessions usually have stronger comebacks.” But his calculations showed that since the end of the recession, places with high levels of debt have not had robust recoveries.

Other economists — from both political parties — were making the same point around the time Obama came to office. Blinder, a Clinton administration official, and Martin Feldstein, a Reagan administration official, developed plans calling on the government to commit hundreds of billions of dollars to restructure millions of mortgages with lower interest rates and principal balances.

Said John Geanakoplos, a Yale economist who proposed a plan to reduce principal: “I think the missed opportunity to forgive principal at the end of 2008 and beginning of the 2009 was the biggest mistake the administration made in trying to deal with the crisis.”

So why didn’t the Obama administration accept the proposals to reduce homeowner debt?  The Post notes:

But despite exploring many proposals, the administration did not see a plan that did not have the potential to cause “effects worse than the cure,” he said, such as cratering the financial system by forcing banks to absorb huge losses.

In other words, the government chose the big banks over the little guy, dooming both.

The administration – under the false banner of “homeowner relief” – simply threw money at the big banks to “foam the runway” so they wouldn’t suffer a crash landing.

As some of the leading modern economists argue, forcing big banks, bondholders and other creditors to write down some of their bad debts is the only way out of our economic malaise.    We need a debt jubilee.

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  • http://www.facebook.com/people/Michael-F-Rivero/688092586 Michael F Rivero

    It is the sum total of debt that is killing our economy, and simply shuffling the debt around from public to private and back again will not fix it. The core problem is the Ponzi-scheme private central bank issuing all public currency as a loan at interest; a system which by design always produces more debt that money with which to pay that debt, to make the bankers rich and the public slaves to debt.

    • LiberatedCit

      The core problem is our government is bought and paid for and the politicians who enable the feds. They will be coming after your social security and 401k’s rather then going after the banks.

      The U.S. Constitution: Tool of Centralization and Debt, 1788-Today

      http://www.garynorth.com/public/7833.cfm

      Goldman Sachs CEO: Americans Should Work Longer & Receive Fewer Benefits
      http://frontporchpolitics.com/2012/11/goldman-sachs-ceo-americans-should-work-longer-receive-fewer-benefits/

      CONVICTED: Bush 1300+, Clinton 1000+, Obama 0.0 (+/-)

      http://dailybail.com/home/convicted-bush-1300-clinton-1000-obama-00.html

    • Theo Johnson

      or You need to prioritize spending your money on the things that give you a return, making tough cuts in your household budget and always making payments larger than your minimum.

      • michaelrivero

        That may make sense in a household, but under the US Government, they borrow and spend while telling US that WE have reduce our lifestyle to make the payments.

        I never consented to that, especially with a government that spends taxmoney not on the taxpayers but on reckless wars of conquest, bailing out Wall Street, and propping up Israel.

        And when you consider that the Federal Reserve, by issuing all of the public currency as a loan at interest, by design creates more debt than money with which to pay that debt, the only real way to ever get out of debt is to tear down that Federal Reserve and go back to government issued currency as the nation was started with.

        Indeed it is one of the terrible ironies that the United States is using the threat of war to force nations onto the very same system of banking we ourselves fought a revolution to be free of.

  • RM

    I worked with a 32 year old accountant who purchased her home in the peak month of the housing bubble. I asked her if she didn’t think she was buying at the wrong time, but she insisted that she wanted the house. Six months later at lunch time, CNN was reporting that the homes had lot as much as $80,000 from the peak. I mentioned that the thing bothering me was that I had never owned a home but i was going to have to pay for this crap. The accountant blew her stck and told me she deserved the house because of her race. she said this in front of other people. Well, her 16 year old daughter got pregnant and went on welfare He 6th grade son was expelled from school and her husband – a mechanic lost his job. A little bit later he wrecked his motorcycle on the Antelope Valley Freeway and spent 2 weeks in the hospital. He promptly bought another motorcycle with his insurance settlement and their home was foreclosed.

    I have another acquaintance who employed a housekeeper who had purchased a home with her illegal alien boyfriend. She moved out of her rent controlled apartment, then after her home was foreclosed had to pay market rate for her apartment. She was worse off than ever, all because her illegal alien boyfriend convinced her to sign for the loan.

    I am a 57 year old college graduate who was frugal with their money and I am paying for all this crap without ever owning real estate. Who is speaking up for me?

    • Ded

      You left out the other important parties in these formulaic conservative tall tales. What were the Banks doing? Being equal opportunity hustlers, throwing as many insured liars contracts onto the heap as possible?
      Next time you drive over a bridge, let’s assume the rules were followed and you have faith in engineering, if you plummeted to your death no one will blame you for citizenship or intelligence.

  • LiberatedCit

    obama would prefer to go after seniors and your 401k’s rather then his bankster pals

    Goldman Sachs Attacks Social Security

    http://www.goldmansachs666.com/2012/11/goldman-sachs-attacks-social-security.html

    Multi-Millionaire Goldman Sachs CEO Blankfein Says Americans Should Work Longer and Receive Fewer Benefits

    http://www.allgov.com/news/top-stories/multi-millionaire-goldman-sachs-ceo-blankfein-says-americans-should-work-longer-and-receive-fewer-benefits-121123?news=846283

    Republicans About To Fall For A World Class Social Security Bait-And-Switch Con

    http://www.forbes.com/sites/lawrencehunter/2012/11/19/republicans-about-to-fall-for-a-world-class-social-security-bait-and-switch-con/

    Private Savings Accounts May Be “On the Table” in Fiscal Cliff Talks

    http://www.nationalseniorscouncil.org/

    CONVICTED: Bush 1300+, Clinton 1000+, Obama 0.0 (+/-)

    http://dailybail.com/home/convicted-bush-1300-clinton-1000-obama-00.html

  • http://www.facebook.com/martin.jones.16121471 Martin Jones

    We should look to Iceland for quidance.

  • JosephConrad

    This prattle. The U.S. Debt is not REAL. It is the product of Interest the 12 privately-owned banks of the ‘Fed” have arbitrarily attached to the U.S. national debt. Add to it the TOTALLY FRAUDLENT financial instruments (collateralized debt ‘securties’) created to dupe and impoverish buyers. ALL debtors by dint of said CDS should and inde3ed MUST default on them. The alernative will be WWIII caused by the OLD WHITE WEALTHY specifically to attempt to ‘perpetuate’ their Wealth, Power & Control. DEFAULTING on their FRAUDULENT DEBT will IMPOVERISH THEM an free the world’s citizens from their SLAVERY.

 

 

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