I doubt if anyone would argue that a world wide asset bubble created the financial crisis, the worst component of which was residential mortgage abuse.

Inferior and fraudulent RMBS's and bad servicer practices were the essential problem of the economy in 2009 and remain so today. The banks have an incentive to foreclose instead of modify loans, but consumers have learned how to fight foreclosures. When foreclosure inventory is still overhanging the market, consumers are smart enough to know we haven't hit bottom on prices, so they hold off on purchases. Loan modifications haven't worked very well, but the issue goes back to bank incentives, not to mention continued fraudulent practices.

The lack of a housing industry rebound is the single biggest factor in high unemployment. No less than Buffet has said that when new housing starts get up into the range of a million units a year, unemployment will drop to 7%. The log jam in foreclosures and the disincentives of banks to modify loans are helping to keep the economy in limbo.

Investors such as PIMCO realized some time ago that banks, particularly BofA, had not only misrepresented the securities but were aggravating investors' losses by running up foreclosure fees and lowering the recovery value of mortgages over and above what could be achieved through modifications. 22 large investors reached a settlement of $8.5B of put backs, about 5 cents on the dollar of low performing RMBS's. The settlement includes releases of liability for B of A and a reform of their servicer practices. Perhaps the settlement, bad as it is, would have helped the log jam. That settlement has been enjoined by about everyone on the planet and seems to be going nowhere.

Enter Refinance. Both the GSE's and the banks, particularly the big 4, have steadfastly fought refinancing efforts by consumers. In effect the GSE's and the banks are sitting on trillions of dollars of mortgages, the large majority of which are performing and which have interest rates above market rates. Many of these loans are underwater but are still performing. Loan to value restrictions keep them from being refinanced. As for better off borrowers, fear of what a refinancing wave would do to their existing net interest income is resulting in the GSE's and the large banks essentially blocking housing refinance in any way they can.

So where is the leadership of Obama in all of this? He has to decide whether the banks, large investors and GSE's are going to take a haircut in order to get modifications and refinances moving. There is no more effective direct stimulus and resultant job creation than millions of consumers able to refinance to lower interest rates, including some who are under water.

Senator Boxer has introduced a bill to allow 2 million home owners to refinance even though their houses are underwater. These are people who have been paying and who want to stay in their homes. There is not much of a moral hazard question here, the houses are underwater because of the precipitous drop in housing prices, not necessarily because of bad decisions. As for Investors they need not appear either having been hurt or generous in going along with refinances which lower their net interest income. Far from having been hurt by the homeowners in question, Investors have benefited greatly by homeowners being blocked from market entry into loans with competitive interest rates. Investors acted knowing the odds of refinance. They have been treated too generously already.

As for the banks, it's, Geithner, Geithner, & Geithner.

But I think Refinance, Refinance and Refinance would give Obama a real chance to solve the jobs issue and a better shot at re-election than continuing to fear the systemic risks of having banks, especially B of A, finally come clean about their inflated assets.