Obama’s New Economic Advisor Defended Subprime Lending

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Austan Goolsbee and President Obama (AP Photo/Pablo Martinez Monsivais)

It has become taboo to defend anything having to do with subprime lending. Why would you? It’s clear now that banks and mortgage brokers handed out expensive loans to many people who had little ability to make the payments. It’s also clear that the result was not benign. The result was a terrible financial crisis that ended up hurting not just the people who couldn’t make their loans payments, but everyone in the entire world. Some people saw the subprime problem coming. Many more these days like to claim they did. One person who is definitely not in the early spotters camp is Austan Goolsbee, who last week Obama named chair of the White House’s Council of Economic Advisers. Just months before the financial crisis got started, Goolsbee defended subprime lending. Here’s how Goolsbee wrapped up a New York Times editorial column he wrote in March 2007:

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

Turns out the default rates were much worse than Goolsbee predicted. In fact, the percentages of subprime loans that went sour ended up being much worse. In 2007, over 60% of the subprime mortgages made in that year ended up in default.

Put aside what this says about Goolsbee’s forecasting ability. While Goolsbee was well within the majority view at the time, many had already begun to predict the problems subprime would cause. What’s more, it doesn’t really matter at least for now what Goolsbee thinks about subprime lending. It is effectively dead for the near term. And Goolsbee has come out in favor of the Consumer Financial Protection Agency. So he recognizes the need for increased lending regulation.

The really troubling part of this op-ed is that Goolsbee seems to come down strong on the side of home ownership being a force for economic good. And that could be a very bad sign for economic policy in the next few years. Here’s why:

Most Presidents have been boosters of home ownership. George W. Bush and Bill Clinton, in particular, pushed federal policies that increased the percent of Americans who owned homes. The result of those policies have not been so good. Still, most people believe giving people the ability to own their own home is a good thing. That’s probably why Obama has mostly avoided talking about the matter. But his appointment of Goolsbee suggests Obama is not ready for any radical rethink of whether home ownership is a good thing.

That’s something we really need to do. A few weeks ago Barbara Kiviat wrote a compelling cover story for TIME arguing that home ownership as a social policy is overrated.

For the better part of a century, politics, industry and culture aligned to create a fetish of the idea of buying a house. Homeownership has done plenty of good over the decades; it has provided stability to tens of millions of families and anchored a labor-intensive sector of the economy. Yet by idealizing the act of buying a home, we have ignored the downsides. In the bubble years, lending standards slipped dramatically, allowing many Americans to put far too much of their income into paying for their housing. And we ignored longer-term phenomena too. Homeownership contributed to the hollowing out of cities and kept renters out of the best neighborhoods. It fed America’s overuse of energy and oil. It made it more difficult for those who had lost a job to find another. Perhaps worst of all, it helped us become casually self-deceiving: by telling ourselves that homeownership was a pathway to wealth and stable communities and better test scores, we avoided dealing with these formidable issues head-on.
Even after financial reform has passed, Obama has a lot of home ownership related issues to resolve, one of which will have major repercussions on whether we are able to get our national debt under control. The mortgage deduction tax credit is one of the most costly breaks in the code. If we want to lower the deficit we will have to take on the issue where it makes sense to cut taxes, as well as where to cut spending. If Goolsbee is saying that the mortgage deduction credit is off the table, then I think reducing our national debt gets a lot harder.