Can Barack Obama channel Teddy Roosevelt?

September 9, 2011

My copy of the new book “Feynman”, written by Jim Ottaviani and illustrated by Leland Myrick, arrived last week and does not disappoint. I discussed it earlier on, “Steady state or dream state?” On the second page of this comic narrative led by one of the most remarkable personalities of the 20th century, Feynman asks:

Different theories of physics are very similar. Maybe that’s just because of our limited imagination … We try fitting every new phenomenon in the framework we already have! … Maybe it’s because we physicists have only been able to think of the same damn thing over and over again. Of course another possibility is that it is the same damn thing over and over again.

I read the words of the great American physicist last night as President Barack Obama was proposing yet another fiscal stimulus plan to a joint session of Congress. Basically Obama gave the same speech as last time and, again, largely avoided discussion of housing or banks. Indeed, the Obama Administration has been fighting against change since the President took the baton from George W. Bush. Witness Dodd-Frank, TARP, HARP, HAMP and various other deliberately ineffective policy initiatives from Washington supposedly focused on the banking and housing sectors.

A decade after the 9/11 attacks and the subsequent boom and bust in the housing sector, Americans remain unwilling and unable to embrace economic change – or to respond affirmatively to this change. Perhaps the biggest change facing us is the ongoing deflation of the bubble economy, which is manifested in stark terms by the reduction in both demand for and the supply of credit. Until we break the cycle of deflation, employment and economic activity will not rebound.

Both Washington and Wall Street remain defiant in their refusal to accept that there are probably still as many losses to be taken on housing and related securities as have already been recognized to date. And there is no concession among America’s political oligarchy that existing banks must be restructured in order to fix housing, restart credit creation and avoid economic catastrophe.

Pollock’s first law, named after American Enterprise Institute resident scholar Alex Pollock, states that debts which cannot be paid must default. In an upcoming article in Mortgage Banking Magazine, he notes that the political class resists real change in existing structures and debt:

Because this iron law and its implications are highly unpleasant, financial actors and politicians strive mightily to escape them, in spite of the fact that they cannot, with scheme after scheme. All to no avail, of course. The massive losses must ultimately be taken. So the questions are not: Will the loans default? They will. Or: Will the losses be huge? They will be. The only real questions are: What form will the defaults take? Who will take the losses? And when will the losses be recognized by those who are going to take them?

Notice that there was barely any mention of broad mortgage refinancing in President Obama’s speech last night, merely a comment about more emphasis on helping profoundly under-water borrowers via the HARP program. But without relief for the millions of home owners that cannot refinance their homes, the economy will not recover and many of these borrowers are likely to turn into future defaults. More defaults mean more deflation, fewer jobs and social instability.

The real world impact of the studied inaction by President Obama can be seen in the increasingly desperate situation at Bank of America. The bank has been selling assets willy-nilly and now has threatened to start closing branches and laying off 42,000 people, Reuters reports. Yet as I discussed in a previous post on, “Housing, debt ceilings & zombie banks,” Bank of America’s parent company needs to be restructured. See my discussion with Aaron Task and Henry Blodget on The Daily Ticker about how a BAC restructuring ought to proceed.

If President Obama was really concerned about jobs, he would pick up the phone and order Treasury Secretary Tim Geithner to start discussions with BAC about a voluntary restructuring with government and industry support. With Geithner, Fed Chairman Ben Bernanke and FDIC Chairman Martin Gruenberg standing around, the President would tell the American people that the bank subsidiaries of BAC are sound, that there will be no layoffs, and that the White House and Congress are directing Fannie Mae and Freddie Mac to move aggressively to refinance every performing American borrower who wishes to do so.

But of course this would require Barack Obama to get some new advisers, grow a set of cojones and start channeling President Teddy Roosevelt — and that is probably not going to happen. Just remember, Mr. President, that inaction does have a cost.






We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

I believe it was Joe Nocera in the NYT who identified 55M mortgages that are current but stressful. I’m one of them: 800 credit score but unable to refinance as my income is investment related. I have a large mortgage and could save several thousand USD per month. Nocera wondered why the Natl. Real Estate Board or whatever it’s called wasn’t lobbying hard to get something done.
I was waiting for comments last night but as you so aptly pointed out, they just weren’t there….. Thanks.

Posted by Mavenwood | Report as abusive

Facing reality is difficult for all of us at times. We buy and borrow over our heads, never thinking about the day of reckoning that will eventually come. So who is going to save us from ourselves? We look to the government to solve the problems that we ourselves created. If I buy I huge house that I cannot afford, should the government come to my rescue? Or should I suffer the slings and arrows? The government may come to my aid with its various programs, but the fact remains that the problem is mine. Our government is no different than any individual – borrowing beyond our means to repay can only lead to disaster – and it is on its way. We have to embrace reality and allow those who have acted irrationally to suffer the consequences – that includes the politicians who seem to be living in a world of make-believe, beyond reality.

Posted by Goldenbarstewrt | Report as abusive

Since about half the US has a few years wages in urban residential real-estate, a nation wide real-estate bubble is too big for the government to fix once it busts. All it can do is create demand (by spending) to replace spending the imaginary wealth. One objective which Feds should have is fix residential mortgage rates so average housing remains a fixed multiple of average wages. It never had that power responsibility. Asking the poorer half of nation make good over evaluation of residential real-estate by the richer half that have it is unjust.

Samuel Reich

Posted by SamuelReich | Report as abusive

I agree with your assessment, but there is a way out of this mess using a mortgage swap program directed at consumer homeowners directly.
The Fed wants to stimulate the economy, but has to do so without creating inflation. The Fed could create a fund only available tp Fannie Mae and Freddie Mac (F&F) F&F would then create a fixed 4.5% 30-year mortgage available to everyone, but rolled out by zip code, from those zip codes with the least mortgages to the most. A homeowner would surrender their original loan and be immediately granted the new one. The homeowner would pay no fees of any kind. F&F would pay off the original loan in full, minus any early termination fees. F&F would then be free to sell the loan into the market and use the money to refill the mortgage buyout fund. At the end of the program, F&F would pay the Fed back in full.

This program would have the effect of satisfying every loan in America. This would immediately clean up the balance sheets of the banks, domestic and foreign with holdings in America. Securities based on the original mortgages would be satisfied as the loans were paid off, reimbursing investors in full, and relieving mortgage insurance companies of their obligations (CDOs) allowing companies like AIG to get free of their obligations. Outstanding foreclosures and those in process would be effectively rest for 2 years, allowing the economy time to heal. If this plan is carried out, the economic disaster effectively comes to an end immediately.

As I understand it, there is a plan to extend the term to 40 years so real estate investors could recoup their loss interest. If this is the deal with the devil that’s required, then so be it. Plans like HARP will never work, as they require those with the most to lose to willingly take a loss, which is about as anti-capitalistic as possible. Of the 800,000 homes already foreclosed on, an assessment program could be created to review these properties to determine which have economic worth, and which should be demolished. Independant insurance adjusters could be used to review the properties for repair costs. Those requiring more money to repair than they would be worth would be “totaled”, just like cars. Blocks of urban housing would be consolidated to form 1 acre blocks for redevelopment. The increased value of the new homes, or reduced need for social service would pay for the program.
Leadership requires being both benevolent, and a dictator. If we are going to survive these times, we are going to have to get both creative, and, at times, destructive. By the way, while the times require a reboot of capitalism, the money lost in the transition will not compare to the money earned once the system is back on-line.
Love the Theodore Roosevelt reference. He knew both how to keep robber barons in check, and how to save them once they destroyed capitalism.

Posted by Avatar21 | Report as abusive

I just read an article about Obama channeling Franklin Delano Roosevelt. If I am not mistaken, and I am only going by the information provided to me in school, both Franklin Roosevelt and Teddy Roosevelt are dead and channeling is described as : the practice of professedly entering a meditative or trancelike state in order to convey messages from a spiritual guide. This article confuses me more than enlightens me.

Posted by Bagwa | Report as abusive