Obama is Right, We Need Mortgage Refinancing—David Frum

This is part of a series discussing the State of the Union. Click here to read Part 1.

Now a word about where the president is right.

You can date the origins of the Tea Party to Rick Santelli's famous rant on CNBC in February 2009:

And in terms of modifications, I'll tell you what, I have an idea. You know the new administration's big on computers and technology. How about this, (Mr.) President and new administration -- Why don't you put up a web site to have people vote on the Internet as a referendum to see if we really want to subsidize the losers' mortgages, or would we like to, at least, buy cars and buy houses in foreclosure and give them to people who might have a chance to actually prosper down the road, and reward people that could carry the water, instead of drink(ing) the water.

Of all the ideas that have circulated as to how we might spur recovery from the financial crisis, it has been the idea of mortgage modification that has been most anathema—more anathema than money creation, more anathema than spending-side fiscal stimulus, certainly more anathema than tax-side fiscal stimulus, even more anathema than TARP and bailouts. Yet of all measures, it's the one that is most indispensable. Consumer-led growth won't resume until the household sector is less burdened by debt. Household debt declined rapidly between 2009 and 2011—largely because so many borrowers defaulted. Now—good news—the rate of default is subsiding. As a result—bad news—the pace of debt reduction is slowing. We're achieving a new but disappointing equilibrium, in which people who can just barely afford to service their mortgages are indeed just barely servicing them, but aren't buying much of anything else.

Lower interest rates should allow such people to refinance and improve their income flows. More affluent Americans have been doing just that on a big scale since 2009. More financially stressed Americans are discovering however that banks don't want to talk to them. Just pay and keep paying, until you can't pay—even if that means you don't or can't pay for anything else. That's a formula for another decade of weak consumer demand.

Government encouragement of mortgage refinance could help. The Obama administration has been working on such a program, and now it's announced, with details soon to be unveiled. The devil is always in the details, and there may be much wrong with them. But the a priori rejection of the idea we'll hear from some quarters is dangerous. Willingness to refinance should have been a precondition of TARP aid back in 2008 and 2009. It wasn't, but let's not forget that most of the institutions that will be asked to refinance now are institutions that only exist because of government aid.

There was always something unintentionally bitingly ironic about Santelli delivering his rant about the sacredness of obligations from a trading pit full of employees of banks and brokerages. The truth is that not all of us do have to pay our own debts. Only some of us do. Banks were bailed out to save the economy from collapse. Now homeowners should have their burden adjusted to save the recovery from sputtering.

—MORE TO COME—