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Monday, July 18, 2011

Paul Krugman: Letting Bankers Walk

There's no good reason to go easy on the bankers:

Letting Bankers Walk, by Paul Krugman, Commentary, NY Times: Ever since the current economic crisis began, it has seemed that five words sum up the central principle of United States financial policy: go easy on the bankers. ...
Why the kid-gloves treatment? Money and influence no doubt play their part... But officials have also argued at each point of the process that letting banks off the hook serves the interests of the economy as a whole.
It doesn’t. ... And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense. ...
As far as I can tell, there are two principal arguments being made for letting the banks off easy. The first is the claim that resolving the mortgage mess quickly is the key to getting the housing market back on its feet. The second ... is the claim that getting tough with the banks would undermine broader prospects for recovery. ...
The claim that removing the legal cloud over foreclosure would ... help support housing prices ... leaves me scratching my head. It would just accelerate foreclosures, and ... that would mean more homes offered for sale... An increase in the supply of a good usually pushes that good’s price down, not up. ...
You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration making a major push to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?
Sorry, but the case that letting banks off the hook would help the housing market just doesn’t hold together.
What about the argument that getting tough with the banks would threaten the overall economy? Here the question is: What’s holding the economy back?
It’s not the state of the banks..., those markets have ... returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.
The big drag on the economy now is the overhang of household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks ... would not.
So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions.

    Posted by on Monday, July 18, 2011 at 12:42 AM in Economics, Financial System, Housing, Regulation | Permalink  Comments (50)


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