November 20, 2012

Obama's biggest mistake: mishandling foreclosures

Huffington Post - Yale University economist John Geanakoplos said the failure of President Barack Obama's administration to stem the foreclosure crisis has stymied efforts to restart the economy.

"I think that's the biggest mistake of the Obama administration," Geanakoplos said, referring to the administration's failure to convince lenders to reduce the principal on underwater mortgages. "Writing-down interest, as the government did, just produced a bunch of people who re-defaulted anyway."

Geanakoplos made his comments at a panel of economists at Yale Law School. He said reducing the principal on mortgages that exceed the value of homes would have made everyone better off by helping borrowers stay in their houses, helping lenders recoup as much money as possible, and helping housing prices recover.

But instead, he said, the Federal Reserve has been stuck with the burden of reviving the housing market when it does not have the power to oversee debt in the economy. As a result, he said, the Fed's stimulus measures have been ineffective: "The rich are getting richer. The Fed wants them richer so that they’ll spend a little more money. That’s trickle-down economics."

There have been roughly 8 million mortgage foreclosures since the housing crisis began, according to Geanakoplos.

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