“Housing was terrible.” So begins Tim Geithner’s lecture on housing in his new Coursera course, “The Global Financial Crisis.”
Tim Geithner, U.S. Treasury Secretary from 2009 to 2012, explains what the government did to stop the financial panic of 2008 from becoming another Great Depression. (Geithner is quite fond of making comparisons to the Great Depression in the course.)
The two modules in the free Coursera course that Geithner teaches are sort of a play-by-play of how the government saved the world.
I have a new respect of Geithner after watching his lectures. Because he was head of the New York Fed for five years before he became Secretary of Treasury, I had him pegged as a Wall Street guy. I figured his motto must be “Save Wall Street, Save the World.” (My apologizes to the cheerleader in “Heroes”.)
Although, to be fair, Geithner was probably less invested in the success of Wall Street than his immediate predecessor, Henry Paulson, who was CEO of Goldman Sachs for several years before taking over as the head of the U.S. Department of Treasury.
Failures Before the Crisis
In the Coursera course, Geithner briefly mentions the origins of the crisis.
Geither’s top cause, “Home equity was too thin.”
In another section, Geithner asks, “How do we balance the imperatives of mortgage accessibility and market stability?”
I’ll translate; “Low down payments make homeownership more affordable but they also make home prices more unstable. How do you handle a policy that increases homeownership slightly but also increases home price instability greatly for all current homeowners?”
He goes on to say on one of his slides, “Should we have mandatory down payment requirements? And how high should those down payments be?”
It seems to me that Geithner thinks we should have mandatory minimum mortgage down payment requirements but he chickens out and doesn’t say so directly.
I wonder what Geithner’s reaction would be to the return of the 3.5% down payment mortgage.
Digression: Minimum Down Payments
Canada has a minimum 5% down payment and that’s one reason why Canadian home prices didn’t crash when ours did.
A 5% minimum down payment in the U.S. would have muted the home price increases during the boom and it would have also muted the number of foreclosures and the home price decreases during the bust. A nice, simple, double-edge price stabilizer.
But that part about “muting home price increases” would be very unpopular in the U.S. It seems the U.S. is in favor of all policies that increase home prices, although they’re often pitched as altruistic, affordable housing policies.
Personally, I’ve never been able to wrap my head around the idea that policies that increase home prices are “affordable housing” policies. But everyone from the banks to affordable housing advocates seem to think that extremely low down payments are good. Meanwhile, Americans spend more and more of their incomes on housing. More expensive homes seem less affordable to me.
Housing Finance Still Broken
In his section on “Unfinished Business,” Geithner’s second item has this unusually blunt statement, “The housing finance system is still broken.”
Moral Hazard of Bailing Out Everyone
I was surprised how self-aware Geithner was about the “moral hazard” of bailing out the irresponsible people who were responsible for creating the financial crisis. Moral hazard seems to be a big concern for Geithner.
His point of view is that in normal times you would let an irresponsible company fail but during a panic you just can’t because each failure ratchets up the panic making controlling the panic even more unlikely and expensive.
Geithner seemed fully aware of the unfairness of bailing out those who created the crisis, unfortunately, that was the only way he thought he could stop the panic. And it probably didn’t hurt that he has was also bailing out the industry and the people he had known for years, Wall Street.
“It cannot be morally responsible to allow depression in the hopes of deterring future risk-taking.”
I’ll translate; “It’s wrong to punish the irresponsible jerks who caused the crisis if that causes the economy to go into a depression.”
“What seems unjust is just.”
Bailing Out Everyone… except Homeowners
Another surprise to me was Geithner’s regret over not being able to save homeowners in the same way they saved finance and Wall Street.
Geithner seemed pretty proud of his accomplishments in the crisis, except for housing.
He lists proposed housing policies that would have helped homeowners but which didn’t get implemented. He complains that Congress didn’t create the programs or give the agencies the powers they needed and, by the way, debt forgiveness for homeowners would have been very expensive.
His top non-approved proposal was to treat mortgage debt like other debt in bankruptcy courts which would allow federal judges to reduce the mortgage debt during bankruptcy, AKA “cramdowns.” The fact that twice they couldn’t pass such a difficult-to-abuse policy – you have to be going through bankruptcy, after all – makes me sympathetic to Geithner’s complaint.
Foreclosures are what killed home prices. Anything that lowered the number of foreclosures would have lowered the downward pressure on home prices. Allowing mortgage debt reduction in bankruptcy wouldn’t have lowered the number of foreclosures a ton, there weren’t a ton of bankruptcies, but it would have had some impact.
Punish The Little Guy
My pet peeve about the housing bust was that the banks and Fannie and Freddie would foreclose on people and sell their homes for an amount many of those foreclosed homeowners would have been willing and able to pay for the house! But lenders preferred to foreclose instead of renegotiate the mortgage debt.
So millions of additional foreclosures hit the market further tanking home prices. In addition, those foreclosed upon homeowners were put in a penalty box and couldn’t get new mortgages for years which lowered demand.
I assume the bank and government thinking at the time was, “If we bail out one homeowner, they’ll all demand to get bailed out and that would be too expensive.”
Unlike with the financial institutions, it seems the goal here was to punish homeowners even if it made the banks worse off by increasing the number of foreclosures and thereby lowering home prices even more.
It seemed, for whatever reason, that what I’ll call the Geithner Rule, ‘Ya gotta bail out everybody to save the world’ wasn’t applied much in housing.
And remember, many of the mortgages the banks foreclosed on were guaranteed. The foreclosing banks didn’t absorb the majority of those losses.
Too bad there weren’t guarantee programs for homeowners as well as for bankers.
I have a lot of new respect for Tim Geithner after watching his two modules on the Coursera course, “The Global Financial Crisis.”
However, he worked for the Fed before becoming Treasury Secretary so, unsurprisingly, Geithner doesn’t mention as a cause of the real estate boom that the Fed kept interest rates too low, too long in 2002-2004. Those low adjustable rate mortgage rates enabled a lot more money to chase homes and home prices took off.
Today, it’s easy to see why many Americans feel the system is unfair. All the bad actors on Wall Street got bailed out but responsible home buyers whose only mistake was buying in 2005, 2006, 2007 or 2008 didn’t.
Millions of Americans are still underwater on their homes after making monthly payments for 10 years! That’s gotta hurt.
It could even make people have bad feelings toward the political establishment of both political parties.
“The housing finance system is still broken.”
– Timothy Geithner
Here’s Geithner’s short “Conclusion” lecture.
Note: All the quotes in the graphics were take from the transcript of the Coursera course, “The Global Financial Crisis,” however, I created the headings above the quotes. The other graphics are taken directly from the course slides.