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Weak Medicine: Obama’s Flawed Plan for Reforming the Banks

Posted Apr 19 2010 12:23pm 1 Comment

AlterNet is running a timely excerpt from A Presidency in Peril: The Inside Story of Obama’s Promise, Wall Street’s Power, and the Struggle to Control our Economic Future by Robert Kuttner .

When Barack Obama entered office, the housing crisis required very strong remedies. Government needed to use a mix of public funds and concessions on the part of the bankers and investors, who held the mortgage paper, to reduce the principal and interest to a monthly payment low enough to allow distressed borrowers to keep their homes. Otherwise, the foreclosure crisis would keep feeding on itself, glutting the market with vacant homes, driving housing values still lower, and triggering still more foreclosures. But this course would require banks and holders of mortgage-backed securities to take losses, and it was rejected by both the Bush and Obama administrations. Instead, both Bush and Obama relied on a series of voluntary programs, jawboning bankers to reduce monthly payments. Not surprisingly, this approach failed.

Back in 2007, looking over the brink of this precipice, the Bush administration had worked with the banking industry to develop the first voluntary program, called the HOPE NOW Alliance. The group claimed that member banks participated in 2,911,609 “workouts” (reductions of monthly payments) between July 2007 and November 2008, but that number turned out to be grossly inflated. Only 37 percent of the workouts resulted in modification of the loan terms, and of these only 49 percent actually cut monthly payments. Most of the reductions were modest.

Comments (1)
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The recent banking reforms are a total waste of time and will not change the economy. The credit crisis goes way deeper than we think. Most of the blogs on bank index site www.dozenbanks.com are saying that the latest reforms will not help us by one dollar.
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