Is Obama Moving too Slow on the Economy?
Editorial: Waiting Game
Unemployment is rising. Foreclosures are surging. Lending is still constrained. So why exactly is the Obama administration waiting to act?
It is true that more time is needed to show results for policies that are currently in place, including stimulus spending, foreclosure relief and the bank rescue. But it is also clear that joblessness and defaults are worse now than was assumed when those policies were formed. So the need for more federal help is all but inevitable, as are political fights over renewed aid. President Obama may want to avoid those battles until health reform passes, but he still should lay the groundwork in three main areas:
STIMULUS SPENDING One of the arguments against another round of stimulus is that more deficit spending might spook bond investors, forcing up interest rates. The solution to the deficit, however, is not to forgo temporary stimulus in a time of need but to lock in long-term fiscal discipline. The best way for the administration and its Congressional allies to do that is to credibly pay for health care reform. That, more than anything, would show that the budget is in responsible hands.
On the other hand, if health care is “paid for” with gimmicks, the bond market will get understandably nervous — and the administration will lose the credibility it needs to argue for more stimulus spending.
FORECLOSURE RELIEF In a recent letter, Treasury Secretary Timothy Geithner and Shaun Donovan, the secretary of housing and urban development, summoned the top 25 mortgage servicers to Washington later this month, apparently for a dressing-down over the lack of progress on modifying bad loans. It’s still not clear, however, if Mr. Geithner and Mr. Donovan understand what’s really holding up the show.
Their letter said that preventing avoidable foreclosures is an objective “we all share.” In fact, lenders and mortgage investors have several reasons to prefer foreclosures over modifications. Among them, foreclosures allow a bank to postpone taking a loss until the process is complete, which can take a year or longer.
If the administration really wants to kick-start loan modifications, it should revive efforts to allow bankruptcy judges to modify bad loans. At the least, it should impose costs on laggard banks, like higher charges for debt guarantees or higher deposit-insurance premiums.
BANK RESCUE The Obama administration has largely shelved, for now, its plan to finance the purchase of banks’ toxic assets, ostensibly because of the banks’ recent success in raising capital. An alternative explanation is that the banks won’t sell. Recent accounting changes make it less painful for them to keep bad assets on their books. Why admit to losses if you don’t have to?
In any event, the adequacy of banks’ capital cushions hinges, in large part, on success in stimulating the economy and preventing foreclosures: If those efforts fall short, employment, household wealth and consumer spending will not rebound and bank losses will deepen — not only on home mortgages, but on credit cards, commercial real estate and other loans. The result would be a long period of tight lending and of subpar economic growth, if not outright contraction.
If wait-and-see is anything other than a near-term tactic, it’s bound to be a miscalculation. The need for expanded relief and recovery efforts is compelling. Rather than avoid those fights, the Obama team must win them.