I’m sure that when the news broke in late April that former Morgan Stanley Chief Economist Richard Berner was joining the Treasury Department to help build the new Office of Financial Research that progressives weren’t exactly jumping for joy. Just another bankster joining the bankstered-up Treasury Department. But close readers of the Shaila Dewan & Louise Story article on mass mortgage refinancing will note that he’s one of the people pressing for this great idea. My guess is that it’s the kind of thing where the introduction of a smart person who’s been outside the bunker and perhaps had a bit more time to think outside the box has done some good.
Be that as it may, I think that if you look back to his November 2010 briefing for Morgan Stanley (PDF) on fixing housing policy, he’s really singing from the progressive hymnal. He advocates action to facilitate mass refinancing, but also talks about the desirability of moving beyond that to principle write-downs. The basic argument is here:
Many options, little will. Many policy options are available to fix America’s dysfunctional housing and mortgage markets. But the political will to deploy them is scarce. Small wonder: None is a panacea, most reward ‘bad’ behavior, some involve government funds, and none will satisfy all parties. Yet all are better than doing nothing, and a combination of carrots and sticks could create incentives for good behavior and real results.
Dimensioning housing rot. Housing activity and home prices remain at risk despite a deep recession, record declines in home prices and plunging mortgage rates. Credit is scarce, thanks to the shadow inventory of yet to be liquidated homes, the one-in-four borrowers in negative equity, and putbacks. Absent aggressive policy action, we believe the supply-demand balance won’t correct itself for years.
Two groups of remedies. The first group: Mortgage modifications or refinancings reduce monthly payments. They help mitigate defaults but are far from sufficient to solve the problem. That requires policies from the second group: Writedowns or forgiveness of principal. Only when the cushion of owners’ equity is restored will housing and housing finance begin real recovery.
This is the stuff we need. In general, despite the generally bad odor currently attaching to the institutions, the big-picture economics departments of the large investment banks are staffed with very smart people.