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The Foreclosure Crisis: A Government In Denial


The Foreclosure Crisis: A Government In Denial


The Federal Reserve sent a warning shot that housing is the greatest threat to the economy. The government should take note.

As we start the New Year, the executive branch and Congress continue to pretend the gravest risk to our economy and social stability does not exist: the ongoing foreclosure crisis. The financial crisis began with the housing crisis and it will not end until we resolve housing. Government policymakers who seemingly ignore this basic fact are leading the nation to another potential catastrophe.

This past week, a number of important events occurred in Washington, including important recess appointments by President Obama. However, the most noteworthy event did not make front page news: the Federal Reserve’s (apparently) unsolicited memo to the committees of Congress that oversee financial services warning of the dangers the current housing market poses for the economy.

This represents an extraordinary action and underscores both the seriousness of the continuing crisis and the absence of meaningful discussion of the problem in Washington. Bernanke’s memo reviewed federal actions to date and effectively concluded that they were unlikely to solve this national tragedy. The memo concluded, in part:

The challenges faced by the U.S. housing market today reflect, in part…a persistent excess supply of homes on the market; and losses arising from an often costly and inefficient foreclosure process (and from problems in the current servicing model more generally)… Absent any policies to help bridge this gap, the adjustment process will take longer…pushing house prices lower and thereby prolonging the downward pressure on the wealth of current homeowners and the resultant drag on the economy at large.

This memo is notable for several reasons. First, it’s important to remember that when the Fed speaks, it does so in sober, limited terms. So an unprompted Fed warning suggesting “a persistent excess of supply” and a “resultant drag on the economy” is comparable to the Secretary of Homeland Security holding a press conference to warn of the risk of an imminent national emergency. Second, an unprompted memo from Bernanke to the House means that he is so deeply worried he felt the need to speak out in as strong a voice as his position permits. Third, the Fed rarely speaks on issues unrelated to its direct activities. Indeed, The Wall Street Journal subsequently wrote, “For an institution that jealously guards its independence, the Federal Reserve is wading into treacherous political waters.”

Bruce Judson

Bruce Judson is a bestselling and award winning author, a successful entrepreneur and one of the nation’s leading experts on the implications of rising inequality in America. Most recently, he has been developing, and writing about, a practical theory of sustainable capitalism in America, and how this often differs from current federal and state policies. He writes a regular column titled “Restoring Capitalism” for the Next New Deal Blog, a project of the Roosevelt Institute, and recently served as an Entrepreneur-in-Residence at the Yale Entrepreneurial Institute. Judson’s most recent book, published in 2009, It Could Happen Here: America on The Brink , forecast the rising levels of economic inequality in America, if unchecked, would lead to extreme political polarization, absolute political paralysis, anger and mistrust throughout the society, the collapse of the middle class, followed by protests and reform or political instability.

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  1. swilliams119 January 10, 2012

    “A government that cannot care for its old and sick, that cannot provide work for the strong, that feeds its youth into the hopper of industry, and that lets the black shadow of insecurity rest on every home, is not a government that could or should endure.

    Any business unable to make a fair return except by child labor, long hours, dog’s wages, lying and cheating, is not a business that this country wants or needs”. . .FDR

  2. valszy January 10, 2012

    Great quote from a true liberal/progressive president. The problem is the businesses he refers follow much the same business practices Republicans in congress want to foster, and the working men/women who vote republican don’t seem to realize it.

  3. rustacus21 January 10, 2012

    … at the wreckage left from the 2001-2009 administration makes it more than clear citizen activism is going to be key over the next decade. America “NOW” resembles America, circa 1880, when elites and aristocrats carried out orders from corporate monarchs. And citizens were a voiceless, hapless insignificant mass. The concerted efforts of Conservatives since Nixon, to gut the quality of Public Education, inject psycho-programming into mass media & turn civic “discourse” into civic “discord”, has resulted in a societal collective at war w/itself, while the wealthy, corporations, their lawyers & paid politicians laugh at the way we’re at each others throats, instead of understanding “they’ve” wrested control of “our” Democracy from “WE”, the people. Having such a hollow sound now, what will it take for “WE” citizens to realize our collective might? That there won’t be a “rebellion” or “revolution”, except in the minds of those who choose to enlighten themselves, their neighbors, engaging strangers, pressuring representatives & taking massive recall actions against politicians stupid enuff to ignore our “ORDERS” TO ACT ON OUR BEHALF! & 1/2 ass actions during election years is NO solution!!! Americans who also are dumb enuff to see this as beginning on 1/20/2009 are the problem w/America overall & need to be called out & corrected each time they utter such nonsense in the presence of TRULY patriotic Americans who refuse to ACCEPT such! The Housing Crisis is the result of obliterated oversite/regulations, that would have prevented the Mortgage industry from turning into an international casino (see underlying problems for Irish/Spanish/Greek econ crisis, vs. German & French cautions & safeguards against derivatives & “free-market” scams) criminal enterprise! How did I know this? By paying attention to ALL media OTHER THAN CORPORATE MEDIA!!! I don’t have cable. I don’t subscribe to any newspapers w/commercial advertisers. I ONLY listen to Progressive/Liberal talk radio (oh & NPR, when they aren’t going corporate or conservative, which is more the case of late). Patriotism is coherent Progressive engagement w/family, strangers, neighbors & friends, encouraging them toward activism. Failure to do this is a failure of each American too afraid to act on behalf of their nation & the broader world at large! THAT is the responsibility of members of a Democracy…

  4. dpaano January 10, 2012

    In my opinion, it would be cheaper for our government to reconstruct ALL mortgage loans by lowering the principal to what the home is assessed at now and changing the interest rate to the current 30-year rate. If this is done, more people can afford to stay in their homes. As it stands now…because most homes are basically “underwater,” the only way a person can legally get out of their home ownership is to sell, but they have to do a “short sale” because they cannot sell their homes for what they paid for them. This doesn’t look good on your credit report. Secondly, if you even try to refinance your home at what you currently owe, you can’t because what you currently owe isn’t what the house is currently worth! It’s a no-win situation either way that you look at it. Something needs to be done to put people BACK in their homes or to KEEP them in their homes and to also make it easier for people to BUY homes that are for sale and empty. An empty development sitting around doesn’t bode well for the city it’s in or the area….it’s a blight. Homes need to be be lived in one way or the other!!!

  5. kurt.lorentzen January 10, 2012

    The foreclosure crisis is not a government problem. Housing prices were inflated as derivitaitves were sold (the same debt being consolidated and re-sold, aka “mortgage-backed securities”). This was only possible because real estate, and homes in particular, continued in that artificial valuation increase even though it topped everything but healthcare in terms of inflation. Houses cost about 30 times as much as they did in 1970, while wages are only about 3 times that. An entire years worth of house payments on a 30 yr. mortgage totaled less than one month’s payment today. An SEC that could allow numbers like that to continue unchallenged is working for Wall Street, not the interests of the investors or the general population. If you think it’s a Bush thing (ok it was a Bush thing), look no further than Obama’s cabinet appointments and nominees for positions of oversight – Wall Streeters top to bottom. The knee-jerk Dodd-Frank will stifle investment and lead to devaluation. What’s needed is a private sector revitalization. Real capital employing real Americans and enabling them to pay their own debts. Borrowing money to bail out banks, “reconstruct all mortgage loans”, or pay wages will lead only to more devaluation in currency, credit-worthiness, and real estate values.


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