July 27, 2010
Is that where you think many people are today?
I think so, and that is the concern. It's something that is deep-seated and possibly long-lasting. Think about the housing market. People have the sense that they bought this expensive house, and now it is selling for so much less. They are not going to sell it for that. So the sales go down. They stay put. They don't move, because they feel stuck in this house.
When you are in that kind of a situation that you are suggesting that we may be in today, is there a public policy solution that might help turn that around?
I've written a book about that, a book called The Subprime Solution, in 2008. The package should have included immediate stimulus. To some extent it did. We had the G-20 countries get together and agree on a coordinated stimulus package. That's why we’re doing as well as we are. This could have been much worse. But, on top of that, the second part of my book was that governments should take the occasion to make major fundamental transformations of the economy that inspire people to believe that we are moving forward.
What kinds of transformations are you thinking of?
One thing that has been happening is infrastructure investment – building new highways, harbors, and bridges, and things like that. People see that, and, if it makes sense to them and they don't see some foolish expenditure of money, they have a sense of progress moving forward. But, on top of that, we should have financial innovation that is advancing our capitalist system, and which convinces people that we have not given up on capitalism, despite this crisis. We should move ahead with it, and make it serve the people better.
I wanted to see new things that bring to mind the 21st century economy.
I’ll give you one example from my book: We should come up with a different kind of mortgage. The home mortgages that we have now put 15 million Americans underwater. It put them in a highly leveraged, risky investment, and then all it took was a price decline to wipe out with their life savings.
I want to develop a new kind of mortgage, which I call a continuous workout mortgage, with a workout built in. Already, a Congressional conference committee has agreed on a bill that would have funeral plans for corporations, something analogous to what I am talking about. I want to do something like this for mortgages for individuals. It would not be a funeral plan; it would have a workout built-in – a plan for what it will do when you are in trouble.
When housing prices decline, or when someone loses their job, there would be an automatic process that takes place.
Absolutely right. I don't know whether this is left-wing or right-wing. It's for the people. It is a private sector innovation, but it needs government regulatory support. It's hard for private sector innovations of this magnitude to happen. It's analogous to the kind of support that was given in the United States for long-term mortgages in the 1930s – where the government encourages financial innovation, and people see the value and that it leaves them in a more protected state.
We just got health care reform. That was an inspiration. That's part of what may have driven up confidence, but we need more of that kind of thing. It's like putting building blocks in for a stronger economy and for stronger confidence. Every little bit helps. We need a "New Deal" type of government now that will continue to put new structures on our capitalist economy so that it works better.
That was part of your proposal to reinvent mortgages. Some states have nonrecourse mortgages, where people can walk away if their mortgage is worth more than the value of the house. Do you propose that that feature should be eliminated?
It's very complicated. The US has 50 different states, and the laws about walking away from mortgages are complex.
We need a mortgage contract that is written with the consumer and homeowner in mind. Our bankruptcy law has built into it a “fresh start” idea. That's an important idea – a safety net.
But the nonrecourse states allow you to walk away from your mortgage debt without declaring bankruptcy. That’s not the way I have structured it. I did not focus on recourse versus nonrecourse. I viewed it as let's develop a contract that will protect home buyers.
I tend to think of it in terms of modern finance. Modern finance is all about risk management – about hedging risk. Let's extend that to home buyers. It's not a question about rights. It's a question about having a financial institution that's basically caring about its customers. In the long run it will make for a stronger economy.
You mentioned one of the things that inspired confidence on the part of not just Americans, but consumers around the world, was the coordinated stimulus spending in late 2008 and early 2009. You suggested that something that we need more of is spending on infrastructure. Should it be a priority going forward for the American government to focus on additional stimulus spending for infrastructure, rather than on debt reduction?
We obviously have to be concerned about the long-run debt picture. At this point we still need – although it's obviously a judgment call – more stimulus. I wish it could have come sooner before we got into such a negative funk, but I don't think the United States is anywhere near having to worry about its debt levels. The yield on treasury securities are at an extreme low right now, so the world isn’t losing faith. They haven't concluded that the US is going to go the way of Greece. For now we need to continue with the stimulus package.
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