KRUGMAN: No good reason to let bankers off easy

Ever since the current economic crisis began, it has seemed that five words sum up the central principle of U.S. financial policy: Go easy on the bankers.

This principle was on display late in the Bush administration, when a huge lifeline for the banks came with few strings attached. It was equally on display in the early months of the Obama administration, when President Barack Obama reneged on his pledge to “change our bankruptcy laws to make it easier for families to stay in their homes.”

And the principle is still operating, as federal officials press state attorneys general to accept a very modest settlement from banks that engaged in abusive mortgage practices.

Why the kid gloves? Wall Street is a huge source of campaign donations, and agencies that are supposed to regulate banks often end up serving them instead. But officials have also argued that letting banks off the hook serves the interests of the economy as a whole.

It doesn’t. The failure to seek real mortgage relief early in the Obama administration is one reason we still have 9-percent unemployment. And right now, the arguments that officials are reportedly making for a quick, bank-friendly settlement of the mortgage-abuse scandal don’t make sense.

Before I get to that, a word about the state of the mortgage mess.

Last fall, we learned that “robo-signers” were attesting that banks had the required documentation to seize homes without checking to see whether they actually had the right to do so—and in many cases they didn’t.

There still hasn’t been a serious investigation of its reach. States lack the resources for a full investigation—and federal officials, who have the resources, have chosen not to use them.

Instead, these officials are pushing for a settlement with mortgage companies that, reports Shahien Nasiripour of Huffington Post, “would broadly absolve the firms of wrongdoing in exchange for penalties reaching $30 billion and assurances that the firms will adhere to better practices.”

Why the rush to settle? One argument is that resolving the mortgage mess quickly is the key to getting the housing market back on its feet. The second is the claim that getting tough with the banks would undermine broader prospects for recovery.

Neither of these arguments makes much sense.

Removing the legal cloud over foreclosure would just accelerate foreclosures, and if more families were evicted from their homes, that would mean more homes offered for sale—an increase in supply. An increase in the supply usually pushes that good’s price down.

You might point to the mortgage relief that would supposedly be extracted as part of the settlement. But if mortgage relief is that crucial, why isn’t the administration pushing to reinvigorate its own Home Affordable Modification Program, which has spent only a small fraction of its money? Or if making that program actually work is hard, why should we believe that any program instituted as part of a mortgage-abuse settlement would work any better?

What about the argument that getting tough with the banks would threaten the overall economy? The banks aren’t holding the economy back. It’s true that fears about bank solvency disrupted financial markets in late 2008 and early 2009. But those markets have returned to normal, in large part because everyone now knows that banks will be bailed out if they get in trouble.

The big drag on the economy now is household debt, largely created by the $5.6 trillion in mortgage debt that households took on during the bubble years. Serious mortgage relief could make a dent in that problem; a $30 billion settlement from the banks, even if it proved more effective than the government’s modification program, would not.

So when officials tell you that we must rush to settle with the banks for the sake of the economy, don’t believe them. We should do this right, and hold bankers accountable for their actions.•

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Krugman is a New York Times columnist. Send comments on this column to ibjedit@ibj.com.