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Q&A with economist Richard Goettle: Building a floor under housing

Richard Goettle, a lecturer on economics and finance in the College of Business Administration, has written a plan with colleague Eliot Sherman on dealing with the mortgage crisis. They have sent their plan to the president, to congressional committees and to the media.

What do you think of Obama’s housing plan?

It is a much needed beginning that provides $75 billion in direct help to distressed homeowners and up to $200 billion in restoring the health and wellbeing of mortgage lending. My concerns are that it is too small, too slow, too narrowly focused on government-sponsored Fannie Mae and Freddie Mac, and too unwilling to deal with the increasingly deflationary disconnect between actual home values and mortgage principals.

What would you do differently?

My colleague, Eliot Sherman, and I have a plan in which private investors fund a much broader restructuring of distressed mortgages in a way that affordably keeps people in their homes while not absolving them of their original commitments. Our plan also strips bad housing-related investments from and restores equity to troubled financial institutions as it spreads the benefits of a housing market recovery across the broad spectrum of homeowners, investors and taxpayers. Solving this problem requires dealing directly with the mortgages and their principals, inventing policies in which broadly shared gains obviously and substantially outweigh shared costs, and promoting partnerships among all stakeholders so as to achieve a meaningful scale.

Has the government waited too long to address the foreclosure problem?

Absolutely. Evidence of this looming problem appeared as early as 2006 while, institutionally, the speculative bubble in housing continued to be fed. When it burst, as it inevitably would, the spillover effects were shocking in terms of their speed, depth and global reach. The problems deserved prompt and comprehensive action.

The Federal Reserve and the federal government have committed trillions of dollars to stimulate the economy. Why hasn’t the economy responded?

The money has yet to be productively “spent.” Only $350 billion is currently in play and much of it remains as cash and new Treasury purchases on institutional balance sheets. The fiscal stimulus schedules $185 billion for later this year, $400 billion in 2010 and $135 billion in 2011 with smaller amounts to follow through 2019. The remaining $2 trillion exists only in the forms of guarantees, promises and informal concepts and has yet to flow. However, we’ll be spending 6 to 7 percent of our Gross Domestic Product annually for the next three years so it’s hard to imagine it not having an eventual positive impact.

What’s needed to fix the banking system?

No more “bailouts.” Those banks that are technically insolvent should be broken up and allowed to fail. In the U.S., we have an excellent system with a diverse array of policy alternatives for dealing with failed financial institutions. We perhaps should replace “too big to fail” with “too big to exist.”

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