On Monday, I wrote for The American Prospect about Janice Eberly, the former top economist to Treasury Secretary Tim Geithner who is now a potential nominee to the Federal Reserve Board of Governors. In a 2014 Brookings paper, Eberly defended Geithner’s disastrous housing policies, which led to millions of evictions in order to “foam the runway” for the same predatory financial sector which tricked Americans into unaffordable mortgages in the first place. I argued that Eberly’s willingness to defend this inhumane policy ought to disqualify her for the Fed.
But Eberly is not the only Geithner colleague in the rumor mill for the Board of Governors. Austan Goolsbee, who directly helped to design the Home Affordable Modification Program (HAMP), is currently the President of the Federal Reserve Bank of Chicago, but is not a member of the more powerful Fed Board of Governors. He may be under consideration for the bigger job.
In the years since HAMP, Goolsbee’s defense of the program has been a bit less callous and much more grounded in reality than Eberly’s. But he was still a foot-soldier for a deliberate policy of mass evictions. Goolsbee’s argument has been consistent for years: there simply wasn’t enough money available to save everyone, and he had to do the best he could.
Obama officials had only $100 billion available to design their homeowner assistance program. (This money had been earmarked in the Troubled Asset Relief Program, signed in the waning days of the Bush administration.) That sounds like a lot of money, but it was about 1/8th the size of the hole in the housing market.
Goolsbee wrote in his 2014 commentary on Eberly’s Brookings paper:
“The government did not have an additional $800 billion to pay off people’s mortgages (and even if it had, it would have had to deal with a major political outcry about rewarding the undeserving who had borrowed beyond their means). The banks, grappling with issues of insolvency, could not recognize an additional $800 billion in losses on their balance sheets. Consumers seemed unlikely to be able to repay the $800 billion themselves in a troubled economy.”
Austan Goolsbee Comment on “Efficient Credit Policies In A Household Debt Crisis”, Brookings Institution, p. 120
Years later, Reed Hundt interviewed Goolsbee extensively for his 2019 book A Crisis Wasted, an autopsy of what went wrong with the Obama administration’s response to the financial crisis. Goolsbee reiterated this explanation of HAMP:
“We absolutely thought about and understood that there were a bunch of people underwater and if we could, we’d like to do the write-downs. The only problem was there was $750 billion of negative equity in housing — the amount that mortgages exceeded the value of the houses. Somebody would have to eat that money. For sure the banks couldn’t take $750 billion of losses and for sure the government wasn’t willing to give $750 billion in subsidies to underwater homeowners, to say nothing of the anger it would engender among non-underwater homeowners.”
Austan Goolsbee to Reed Hundt, A Crisis Wasted, p. 207
Contrast this with Eberly’s paper, which rather than looking at the issue on its face, constructs an entirely hypothetical model of the housing market to justify HAMP. Where Eberly effectively tries to invent a world where HAMP was a smash success, Goolsbee directly acknowledges that the program was deeply flawed, and ultimately caused a lot of pain. He simply thinks that there weren’t any other options, and he had to do his best with the inadequate funds he was given.
But even working within the $100 billion constraint, it simply isn’t true that Obama officials had no other options for homeowner assistance besides HAMP. In fact, Goolsbee helped ensure that alternatives to HAMP were never considered. His defense of the program is that his hands were tied, but he seemingly went out of his way to handcuff himself.
According to Hundt, during a critical December 2008 briefing with the President-elect, Goolsbee followed Geithner’s lead and told Obama that there was simply no way to prevent at least five million foreclosures, since the federal government simply did not have the funds. (In fact, more than nine million households underwent foreclosure or something like it, according to Hundt.) He then pitched Obama on the earliest version of what would eventually become HAMP.
But Goolsbee didn’t tell Obama that Federal Deposit Insurance Corporation Chair Sheila Bair had her own idea for how to spend that $100 billion — implement a form of principal reduction that could have saved a lot more homeowners. Goolsbee and Geithner personally objected to this plan, since, in Hundt’s words, “Obama’s advisers believed government help for homeowners would send money to those who did not need or deserve it.”
As both of Goolsbee’s statements above show, the Obama administration-in-waiting was terrified of the optics of giving “handouts” to indebted homeowners — even though most of these homeowners hadn’t understood the exploitative mortgages they’d signed in the first place, a problem for which we had to create the Consumer Financial Protection Bureau in 2010.
The story echoes another infamous missed opportunity from the same December 2008 meeting: Obama advisor and former Treasury Secretary Larry Summers bullied economist Christy Romer into not even informing Obama of the size of the economic stimulus that would have been needed to prevent the Great Recession. Summers had personally decided that the politics were too dicey. Economists like Summers and Goolsbee letting their personal political instincts outweigh the president-elect’s judgment helped ensure a deeper, longer, and harsher recession.
The foreclosure crisis lasted years, but even as the situation evolved, Geithner and Goolsbee’s plan stayed in place. As the Prospect’s Ryan Cooper has argued, the banks were in a good enough position to eat plenty of losses by 2010. Obama officials also could have constructed a “garbage bank,” loaded all of the bad mortgage debt onto its balance sheet, then disconnected it from the rest of the financial system. Obama even instructed Geithner to look into doing this, but Geithner disobeyed him.
Instead, they stuck with HAMP, which reflected the Obama economic team’s deep naivete about the same financial sector they were trying to protect. The program had strict and complicated eligibility requirements, and it was impossible for many would-be beneficiaries to even check if they were eligible: in the heat of the 2000’s housing frenzy, many banks hadn’t bothered filling in the required paperwork about their loans, so borrowers couldn’t prove key information required to access HAMP. The same lack of paperwork led the banks to commit industrial-scale forgery so they could get judges to sign off on evicting homeowners.
The biggest design flaw of all, though, was that HAMP relied on loan servicers — the middlemen who only make money if borrower payments keep flowing to their clients — to inform people that they might qualify for a reduction in payments. “Anyone who has ever received a phone call from a collection agency dunning on a bill could have explained to the treasury secretary that the skill set and motivations of servicers do not suggest they are good at mediating compromises between creditor and debtor,” Hundt writes.
It was actually worse than that. Servicers had a direct financial incentive to foreclose on a house instead of adjusting the monthly payments through HAMP. This led to the problem of so-called “dual tracking,” in which one division of a servicing company would slow-walk an application for refinancing while another division fast-tracked foreclosing on the same house.
Goolsbee told Hundt that it simply never occurred to him that lenders and debt-collectors might act unethically: “They would launch a foreclosure against the very people that they had given a temporary modification to. It did not cross our mind that the banks would behave like this.” It makes you wonder if the Obama team bothered asking any actual underwater homeowners about their experiences with their lenders — indeed, the notion that policymakers should, you know, talk to the people they’re trying to help has been something of intellectual revolution in D.C. wonk circles over the last decade.
Still, Goolsbee acknowledged to Hundt that his simple belief that Wall Street would act ethically caused a lot of pain: “That ended up being an Achilles’ heel of the program that engendered hostility among some of the beneficiaries. So you would have thought that anyone getting a dramatic reduction in their monthly payment would be happy about the program, but sometimes it ended up the opposite where we had some people saying ‘I got foreclosed on, your program screwed us over.’”
All of this indicates an economist overconfident in his own discipline, who lacked the practical knowledge and diversity of intellectual lenses needed to construct good policy. This is the fatal flaw among all of the early Obama administration economists — they lacked much faith that any disciplines or experiences besides their own had anything to offer in the policymaking process. The question is: has Goolsbee learned his lesson since?
Well, shortly after he left the Obama administration, Goolsbee joined the shadow lobbying firm 32 Advisors, and its interrelated investment firm 32 Ventures. There, he invested in and advised a broad range of firms, from the cannabis industry to the parent company of Hooters. I wrote about this when Goolsbee endorsed Pete Buttigieg’s 2019 presidential bid.
Currently, there’s some scandal swirling around Goolsbee’s appointment as President of the Chicago Fed; his wife is on the board of the company which conducted the search process. And some Trump-appointed Fed Governors seem irked that Goolsbee is a partisan Democrat. I certainly don’t think that being a partisan is disqualifying for the Fed, as I wrote for the Revolving Door Project newsletter. I do think that having faith in the ethics of Wall Street bankers, as well as refusing to even let views besides your own be considered in a crisis, are serious problems. Goolsbee will have to prove that he’s not who he was in the early 2010s to earn the public’s support for a Board of Governors seat.
PHOTO CREDIT: “Austan Goolsbee, Robert P. Gwinn professor of economics at the Booth School of Business at the University of Chicago” by BrookingsInst is licensed under CC BY-NC-ND 2.0.