For Immediate Release:

Federal reserve bank researchers proposed plan to save people from foreclosure, and through them the banks and the financial system. Action not taken by government.

CAMBRIDGE, MA December 20, 2011 - The US government saved the "too big to fail" banks in 2008. The reason? People were unable to pay their mortgages causing the banks billions in losses. The US Government authorized $700 billion to save the banks. The Federal Reserve Bank also gave them short-term loans that were even larger.

According to a report of the Federal Reserve Bank of Boston, there was another way. Why not save the people who were at risk? If the people were helped, they would be able to pay their mortgages, the banks would not have needed to be rescued and the financial crisis would have been considerably less severe. The cost? They calculated up to $50 Billion dollars overall - less than 10% of what was approved for banks.

Refined variants of the proposals that the researchers have worked on would reduce the amount to just $1 billion dollars, the interest cost of deferred payments, which could be paid either by borrowers or servicers.

The Treasury decided to bail out the banks instead. At the time the US Treasury Secretary was Henry Paulson, previously Chairman and Chief Executive Officer of the investment bank Goldman Sachs.

According to the study by the Federal Reserve Bank of Boston researchers, the people who were at risk were those who lost jobs and had mortgages for more than the value of their homes. Just by helping these people a little to get by until they had another job, their problem would be solved. If the people were bailed out, there might not have been a need to bail out the banks at all.

The Treasury considered other proposals to help homeowners and came up with the Home Affordable Modification Program (HAMP). The HAMP program modifies loans only if it is beneficial to the lender to do so rather than foreclose, and typically will not help unemployed borrowers who can not make payments. The program was not effective, the number of mortgages that were permanently changed was under 200,000 after a year and a half.

Over 20% of the mortgages today are under water, people continue to be foreclosed and the economy is at risk. The plan proposed by the Boston Federal Reserve researchers could still be implemented.

A remarkable new twist to the OWS shout: Banks Got Bailed Out, We Got Sold Out!

Three authors of the study, Chris Foote, Jeff Fuhrer, and Paul S. Willen are research economists at the Federal Reserve Bank of Boston. A fourth, Eileen Mauskopf, is Associate Professor at the Johns Hopkins Carey Business School, and, until this year, was a research economist at the Board of Governors of the Federal Reserve System.

One of the authors, Jeff Fuhrer, is a high level Federal Reserve Bank official, and has recently become a co-faculty of the New England Complex Systems Institute.

To view the full report, visit:
http://www.bos.frb.org/economic/ppb/2009/ppb091.pdf

Jeffrey Fuhrer can be contacted at the Federal Reserve Bank of Boston
http://www.bos.frb.org/economic/econbios/fuhrer.htm

Jeffrey Fuhrer's NECSI co-faculty webpage