The fall of 2010 finds the U.S. in the midst of a "jobless recovery," with no relief in sight for the unemployed.
Last Friday's report of modest job creation failed to reduce the stubbornly high rate of unemployment, which appears fixed at just under 10%. Now President Obama is expressing fear that this could become the "new normal."
Public dissatisfaction with government programs and stimulus spending catapulted Republicans to control of the House of Representatives last week. This new reality will have a profound effect on reform of the government-sponsored enterprises and the housing industry in general. At the same time, reducing unemployment, by all accounts, is crucial to a housing industry revival and to economic recovery.
All the component parts of the housing industry (builders, realty agents, lenders, appraisers, mortgage servicers and, yes, even the Federal Home Loan banks) are amply represented in Washington; however, no lobby speaks for the millions of jobless Americans.
What is not needed now is an array of new federal programs or agencies. What is needed is a critical reevaluation of successful existing government programs and their adaptation to today's most pressing need — the creation and preservation jobs.
Hiding in plain sight is a $1 trillion enterprise whose business model is tried, true and profitable. The might of this enterprise, the Federal Home Loan Bank System and its 8,000 institutional owners, should be brought to bear on job creation just as it was on housing finance more than 75 years ago.
Since its creation in 1932, the system of 12 regional Home Loan banks has been highly successful in facilitating housing development by providing liquidity to the 8,000 banks of all sizes that are the banks' cooperative owners. Though certain banks have incurred losses on unwise investments, the system itself has never incurred a loss on its core activity, secured lending to community banks and other members.
Expanding the system's mission to include job creation would have a positive effect on the national economy. It may be argued that job creation is already part of the system's mission; however, as a recent GAO report documented, job creation is a peripheral, not a core, activity of the system. Moving job creation front-and-center would encourage thousands of community banks to make job-creating small-business loans, knowing that these loans are more liquid.
Making job creation a co-equal systemwide goal could be accomplished in three ways, each of which would build upon a proven structure that is already in place:
- Expand the eligible collateral for bank advances to include any loan that creates or preserves jobs. The banks' Resolution Funding Corp. payments should be rechanneled to support small-business lending by the system's member banks as soon as the Refcorp obligation is extinguished (projected to happen in 2012).
- Establish an internal support structure similar to that used for the Affordable Housing Program but expand its mission well beyond economic development to include mainstream commercial lending.
- Admit as system members other, nontraditional lenders to job-creating small businesses.
These reforms are recommended in a recent white paper by the Morin Center for Banking and Financial Law at Boston University. A salient point of the white paper, which I co-wrote, is that these reforms can be accomplished without congressional authorization. In today's divisive political environment, sadly, even sound public policy initiatives such as this are likely to be sidetracked.
Job creation is already part of the system's mission due to the inclusion of community financial institutions in member roles and alternative forms of collateral such as small-business loans. An executive order broadening the system's mission to include job creation — and the appointment of a permanent director of the Federal Housing Finance Agency (the current head is serving on an interim basis) who is committed to this new mission — would send important signals about the seriousness of this job-creating reform.
Though this could be carried out without legislation, ideally, it would enjoy bipartisan support. It would also deliver a positive signal for the broader GSE reform debate expected to take place in 2011.
The Federal Home Loan Bank System played a crucial role two years ago at the nadir of the financial crisis in providing liquidity to a frightened financial industry. Now, as talk of a "double-dip" recession becomes more pervasive, it is time to reexamine the same system for the potential it has to help address the current unemployment crisis.