This has not been a good week for economic policy news.
On Tuesday nearly every economics resource I read was condemning Ed DeMarco for refusing to consider principle reductions for home owners. Here’s the short version. Ed DeMarco is in charge of the FHFA, a government agency overseeing Freddie and Fannie Mae. With so many people still owing more on their home than it’s worth, allowing homeowners in financial distress to refinance at current rates would save them a lot of money and prevent a lot of defaults. The proposed plans would all improve the budget of the FHFA. DeMarco refuses to consider this. He believes it would cause people who do not qualify to intentionally default hoping to enter the program. He also he believes the program would ultimately cost taxpayers more than it saves.
According to Jared Bernstein, the first is answered rather thoroughly by the proposed plans. He quotes a letter from the treasury as saying:
“…a borrower who defaults cannot be certain that he and she will obtain a HAMP modification, much less…principal reduction. Therefore, a borrower would take a substantial risk be deliberately defaulting: they would have to choose to damage their credit for years to come and perjure themselves on the chance that they would be found eligible for the program.”
While it’s reasonable to think a few people might try to cheat into the program, the incentive against doing so is huge and there doesn’t seem to be any good reason to believe the number who try would be significant.
This argument seems to be his entire justification for his claim that the program would cost taxpayers money. As both Bernstein and Krugman point out, the report he uses to support his decision, from his own agency, says the opposite. It says that taxpayers would actually make money off the program, and that’s without even considering the positive economic effects it would have.
But that’s not all! Yesterday featured an announcement from the Federal Reserve that despite conditions calling for action, they would provide none. And today, despite a recent statement by president Mario Draghi that it would do “whatever it takes” to protect the Euro, the ECB and the bank of England both announced that they will do nothing. Are we truly to believe that the Euro is in no danger under current conditions?
This all has me thinking back to this article. The main point is:
“We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.”
And it is because the alternatives involve risk. The truth is those with the most political power are very afraid of losses, and they will give up a lot of opportunity and turn a blind eye to an incredible amount of suffering to avoid risking loss. It is up to those of us who disagree to voice that – to say that wealth should not be protected at the cost of the unemployed, and to pressure those in power to change their priorities. It isn’t because it’s impossible that this doesn’t happen, it’s because it’s complicated, and the vast majority of people who would stand against the current inaction either don’t understand or don’t care.