Mitt Romney appears to endorse key elements of blueprint to save financial system

Eliot Spitzer and Dylan Ratigan wrote an article that appeared in the Huffington Post (hat/tip MS) on Mitt Romney's State of the Union Challenge on the Mortgage Crisis.

Based on what Mitt Romney said, he too sees a need for banks to act as a safety valve between the excesses in the financial system and the real economy.  Specifically, he wants banks to realize the losses on their mortgages as a first step towards ending the ongoing mortgage debacle.

Finally, a presidential candidate came out and honestly addressed the biggest problem in our economy, the enormous debt overhang in our mortgage market. A few days ago, Mitt Romney was at a forum in Florida talking about foreclosures, and his comments were actually refreshingly honest about our housing and banking situation and the need for a debt write-down. 

We're just so overleveraged, so much debt in our society, and some of the institutions that hold it aren't willing to write it off and say they made a mistake, they loaned too much, we're overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it's worth. 

Mitt Romney was pointing out that the banks are carrying debt on their books at inflated values. When was the last serious politician to make that point, openly? There's more. 

In some cases, if the debt is not in something you can service, it's like you have to move on and start over away from those debts. It's helpful if you get an institution that's willing to work with you, but if you don't you have no other option. 

Romney is now saying that if you can't pay your debts and your lending institution won't work with you, walk away. Perhaps this isn't so surprising, though, as Romney is an expert in debt restructuring. This is actually just common business sense. 

And finally, he offered a real solution to the mortgage debt crisis.

The banks are scared to death, of course, because they think they're going to go out of business... They're afraid that if they write all these loans off, they're going to go broke. And so they're feeling the same thing you're feeling. They just want to pretend all of this is going to get paid someday so they don't have to write it off and potentially go out of business themselves." 

This is cascading throughout our system and in some respects government is trying to just hold things in place, hoping things get better... My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren't will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.

Please re-read Mr. Romney's solution as it includes the key elements of this blog's blueprint to save the financial system.

This is the right approach to the problem. If you force the banks to recognize losses on the mortgage debt they are holding, then all of a sudden they will have an incentive to write down debt. Otherwise, a bank will do anything it can to maintain the fiction that the debt is worth 100 cents on the dollar, including lie, harass, and robo-sign.... 

Still, what's shocking about these comments is how casual they are, as if it's common knowledge that the banking system is still insolvent and that our debt loan cannot be paid back. 

Among financial elites, it in fact is common knowledge.

And regular readers of this blog.

Tim Geithner noted this when he talked about Lehman Brothers and the "air in marks" on the debt it was holding on its books. And Martin Feldstein on the Republican side and Alan Blinder on the Democratic side are both arguing for debt write-downs. Everyone knows this has to happen, that the accounting manipulation needs to stop. But Mitt Romney actually said it....

But what this episode shows is that the solutions to our crisis are understood .... We need a debt deal, as Romney inadvertently noted. More fundamentally, getting rid of the accounting gamesmanship will lead to a healthier economy because it will align financial assets with real economic assets.

As another example, credit default swaps are linking American banks excessively to an unstable Eurozone. Credit default swaps are in fact yet another accounting game designed to further balance sheet fictions. 

Which is why banks need to be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details.

What Americans should be taking from this episode is that finance, while complex, is not conceptually hard. If it's a lie on the balance sheet, it's going to be destructive to ordinary people. If you stop the balance sheet lying, the economy will do better. But while Mitt Romney might have said this out loud, they all know it behind closed doors. Our question is, who will be the first to make this a policy reality?