It’s not fair to expect Mr. Obama’s economists to be clairvoyant. But they did make one avoidable mistake that led directly to their overoptimism. They relied on the same forecasting models that had completely failed to see the crisis coming.

These models, which are also used by Wall Street and various research firms, do a decent job most of the time. But they are notoriously bad at forecasting turning points because they are based on an assumption that the recent past will more or less repeat itself.

Clearly, recent economic history is not going to repeat itself. It included two huge asset bubbles, first in stocks and then in real estate. The models came to treat those bubbles — and the additional consumer spending they caused — as the new normal. When asset prices began falling, the models couldn’t keep up, with either the pace of declines or the economic damage they were causing.

Leonhardt argues that an effective Stimulus and an incipient economic recovery are two different things (i.e. just because the Stimulus is working doesn’t mean the economy’s getting better). His essay sort of suggests that the Administration’s money math meisters should redo their arithmetic and come back with a Stimulus 2 that actually gets the economy going again.

His big conclusion is to back the old car tire right over the rose-colored glasses: Look ahead with a sober eye.

Calculated Risk’s blog has been great at holding Treasury Department “stress test” scenarios for housing and unemployment up against the mirror of reality. Here he simply gives White House senior economic advisor Christina Romer enough rope to hang herself. She bids us to stay tuned as the real fun of the Stimulus starts kicking in, and says the programs will have palpable impact in the back half of 2009. Calculated Risk says, hey, that’s where we are now.

So we should see an impact in the 2nd half of 2009 … and that starts now!

The organizational structures, facilities, and implementation programs to get in place to actually spend $30 billion a month in Stimulus monies are enormous. One can believe that it would take this amount of time to get the infrastructure for spending in place.

But the material issue behind whether the Obama economists are way off in their math boils down to the continued tolerance limits of the financial system that the stress test may have failed to expose.

Also, it’s a natural in a highly politicized and polarized culture that people react in one of two ways to dramatic errors in significant economic forecasting: 1) they think you’re lying or spinning and have something to hide; or 2) they think you’re an idiot.

Either way, credibility takes a hit. So Christina Romer, Larry Summers, and Tim Geithner had better hope they’re right about second half traction for their programs. Not just in measuring whether the Stimulus money has been effectively deployed; but in seeing the multiplier effects of success begin to turn the tide of expectations from negative to positive.

The New York Times reports:

The Obama administration sent Congress a detailed proposal on Tuesday to create a consumer protection agency responsible for financial products, a move that is the first shot in a heated battle with banks and other financial institutions over how to regulate home mortgages, credit cards and other forms of lending.

For their part, banks and mortgage lenders are placing top priority on killing the proposal.

The proposal would create a stand-alone agency dedicated entirely to protecting consumers. It would be added to existing bank regulators like the Federal Reserve, the Federal Deposit Insurance Corporation and the Comptroller of the Currency.

120 days into the weeds of the programs, it’s a slow go.

Under the plan, the government offers mortgage companies $1,000 for each loan they agree to modify, then another $1,000 a year for up to three years.

Hanging in the balance is more than the fate of individual homeowners. The administration portrays its mortgage program as a crucial piece of its broader effort to restore vigor to the economy. If the effort fails, foreclosures will continue to surge and home prices will probably keep falling, sowing fresh losses in the financial system and threatening to crimp credit anew for businesses and households.

Yet in the four months since the Treasury Department announced the program, millions of new homeowners have slipped into delinquency and foreclosure. For now, progress is constrained by the limited capacities of mortgage servicing companies, said Michael S. Barr, the assistant Treasury secretary for financial institutions. He offered the first signs of the administration’s impatience with the institutions that control home loans.

CNBC sought comment on assessment of the success or lack thereof of the initiatives from James Lockhart, director of the Federal Housing Finance Agency, whose remarks covered not just the mortgage modification efforts but housing’s outlook itself.

The issue is, it’s a large-scale problem without a one-stop-shop solution. The answer is as granular as each case by case loan modification applicant.

The vote was the first time either house of Congress had approved a bill meant to curb the heat-trapping gases scientists have linked to climate change. The legislation, which passed despite deep divisions among Democrats, could lead to profound changes in many sectors of the economy, including electric power generation, agriculture, manufacturing and construction.

Victory in the war is another matter.

Ahead of the vote, Big Builder online editor William F. Gloede wrote an informed, impassioned, and somewhat biased opinion piece on how the bill would impact residential builders.

A snippet from Gloede’s essay:

The bill would, among many other controversial provisions, mandate increases in the energy efficiency of homes of 30% upon enactment and 50% above standards set under the 2006 International Energy Conservation Code (IECC) by 2014, increasing by 5% in 2017 and increasing another 5% each three years thereafter until 2030. It would supercede state and local building codes regarding energy efficiency, withhold federal money from states deemed out of compliance and provide civil penalties for builders and/or homeowners. It would give significant new oversight and enforcement powers to the Department of Energy and the Cabinet-level post of Secretary of Energy, an unelected post that goes to a political ally of the President. And each day of occupancy of a structure deemed out of compliance would be treated as a separate violation. Ca-ching indeed. Not to mention dealing with officious federal bureaucrats on the jobsite.

The big problem with these targets–among a multitude of other problems with this bill–is that while they may be feasible, they are impossible as a matter of practicality. Unless builders build, and people buy, today’s equivalent of Buckminster Fuller geodesic-domes, attaining this level of energy efficiency would prove prohibitively expensive. Low-income housing?

The question is how much of the bill will survive the Senate intact. Ironically, construction trade groups have had mixed records in lobbying Senators for their interests.

It will be interesting to see which of the landmark rules as they apply to construction make it into law.

Only those who are compelled by an old-fashioned sense of obligation might continue making payments.

This is the opinion of the Milken Institute’s director of regional economics Ross DeVol and president and chief executive Michael Klowden, which appeared this past Friday in the Financial Times.

They’ve mapped out a plan that the HUD Secretary Shaun Donovan, FDIC’s Sheila Bair, Treasury Secretary Tim Geithner, and the Fed’s Ben Bernanke should consider in light of the feeblest signs that  home buying demand does exist if just a few of the foreclosure headwinds can be muted.

DeVol and Klowden note that the big flaw in Obama’s program to stem foreclosures is not in its mission nor even its structure, but in its math. A 105% LTV ceiling just doesn’t cover enough troubled homeowners, nor does the current program forcefully enough incentivize wavering borrowers to weather the storm and keep repaying.

To fix this conundrum, the Obama administration should add the homeowner principal forgiveness vesting plan to its program. Here’s how it works: After a valuation of the property and proper income and credit verification, two separate loans are made. The first loan, from Fannie Mae, would be for the current value. A second, interest-only loan, from the Treasury Department, would make up the difference between the current home value and the original mortgage.

We wonder how widely shared the two authors’ view is on the following assumptions:

• 6 out of 10 purchases since 2004 are underwater
• Every 100,000 foreclosures prevented translates into .5% on home price stabilization

The big time conclusion:

So, if 1.5m foreclosures were to be avoided, home prices would be 7.5 per cent higher than without the plan.

That’s a lot of wealth destruction avoided, a lot of consumption capacity preserved, a lot of jobs saved.

Still, it’s sad that the sense of obligation to pay back what one borrows is “old-fashioned.” Passe.

By looking at where new-home sales have perked up, one can guess that California, which has added its state income tax credit of up to $10,000 to the first-time home buyer tax credit ante rolling out from the United States government, can serve as a poster child for more stimulus to jolt some virtue into those vicious cycles.

Movements in support of higher home buyer tax incentives are still operating at a state and national level.

Here’s an argument from yet another Ivy school economist about the shortcomings of the Obama plan to stabilize housing by stopping a slew of foreclosures from occurring. Yale economics professor John Geanakoplos stopped by Squawk Box to talk about foreclosures with Huffington Post diva Arianna Huffington, Becky Quick, Carl Quintanilla and Joe Kernen. Watch below to see why Geanakoplos thinks the Obama administration’s plan to prevent foreclosures will be ineffective.

• The headline revelation is that spring selling season has officially been cancelled

So this March-to-June season, when most homes are bought and sold, will be bad, perhaps the worst since the market began to spiral down in 2006.

Across the nation, 19 million houses and apartments — nearly one out of every seven — are vacant, the highest percentage since the 1960s. But only about six million of those homes are for sale or for rent. That means millions more could still flood onto the market, depressing prices further.

• The story swings over to touch on President Obama’s housing policy initiatives, and the fact that they’ll play out in an environment so inimical that the housing plans will get eaten for lunch.

On Wednesday, the Obama administration announced details of a plan that will pay banks to lower monthly payments for troubled borrowers, hoping to avert millions of foreclosures and keep more homes occupied. Despite that effort, most analysts expect the outlook to worsen.

• Next, the story asserts that even though it has cancelled the spring selling season due to consumer and commercial credit disruptions, homes are selling up a storm in markets where prices have corrected.

In inland areas of California, for instance, sales are surging now that prices have fallen sharply. But most of the sellers are not individuals but rather banks that foreclosed on homeowners who could not or would not pay their mortgages.

• We’re supposed to glean intelligence from reporting that some markets’ delcine lagged that of the bellwether bubble markets’ fall. The interpretation and analysis is not of the local job dynamics and broader business dislocations that account for the way San Francisco and New York markets have taken a recent beating, but simply that they took longer to succumb.

New York is not alone. Real estate sales have also slumped in cities like San Francisco and Seattle, which previously seemed impervious. California’s recent experience might offer one roadmap of how the housing slump will play out in other places. But the process will be painful and slow.

• One wonders which question Zelman & Associates CEO Ivy Zelman actually answered when she responded with her quote, “You are really looking at a very, very ugly outlook.”

If home sales are surging where house prices have corrected, and home sales have stalled where prices have not corrected, what is that saying?

Does it suggest that sellers of new and existing might take control of their own destiny in this dynamic? If foreclosure prices can move buyers off the sidelines, and if the second-tier foreclosure flip from investor to home purchaser can get buyers to move, why is the conclusion that there will be no spring selling season?

The conclusion could be that home builders and developers are going to have to short-sell a lot of their inventory and deal with a lot of red ink for the market to clear.

The limbo housing is in is largely self-induced, and will have to self-resolve.

The populace will be part of that resolution because the populace became part of the bubble. There’s a tax penalty for becoming part of the bubble and we’re going to learn how big the penalty is for what we began to take for granted when times boomed.

Meanwhile, April 2009 may be a low point for those who are trying to work through what they hold in assets to gain cash enough to work through more tomorrow. But it’s not because the NY Times has drawn attention to this issue. It’s because structural issues–prices, credit, job trends, household spending, household formations, etc.–have locked into a negative feedback loop or a “downward spiral” and this is part of a storyline that housing veterans have seen before.

They don’t call it “very, very ugly.” They call it a tough but inevitable part of doing business in new residential real estate.

Have a look at the Times’ ”very, very, ugly” infographic.

Click on image for larger NY Times version of the information.

This is a technical analysis. We don’t believe real estate markets obey technical analyses. We believe uncertainty clouds the bottom, but that price-correction will be the only solid floor for housing.

The key conclusion of the Times’ editorial:

A better way to lower the monthly payments for these people is to reduce the principal remaining on the loan. That way, the payments become affordable and, as equity is rebuilt, the borrower has both an incentive and the means to keep current. The Obama plan provides subsidies for lenders to reduce principal balances, but the option is not promoted as prominently as simply reducing the interest rate. That’s a shame. It is a better way to go, but lenders prefer interest-rate reduction to principal reduction, in part, because it appears to minimize the loss they have to recognize upfront.

This is where Congress can make a difference. On Thursday, the House passed a bill that would allow bankrupt homeowners to have their loans modified in bankruptcy court, where the most common solution is to reduce the principal. The bill is overly restrictive, but if passed — and if the Senate doesn’t weaken it any further from the House’s version — it could give underwater homeowners another way to keep their homes.

Perhaps more important, lenders are more likely to pursue sound modifications if the alternative is to face the borrower in court. Best of all, modifying loans via bankruptcy proceedings costs the taxpayer nothing. The costs are borne by the borrowers and the lenders.

Homeowners — like the banks, much of corporate America and the government itself — are suffering under the weight of excessive debt. The Obama plan will make mortgage indebtedness more manageable, but ultimately the debt itself needs to be greatly reduced. The sooner we as a nation move in that direction, the better.

Hence, we need a consumable packaged good product–”Are You Listening Procter & Gamble and Unilever?–Debt ‘B Gone.

The Wall Street Journal’s Michael Corkery has weighed in on the re-emergence of the carryback provision in President Barack Obama’s budget proposal. The story today grazes across the brouhaha created as the NAHB leadership threw the weight of its lobbying support behind the interests of its smaller company members on Feb. 11, as the previous iteration of the measure came under final consideration for inclusion in the $789 billion stimulus program.

Big home builders have lobbied for an expansion of this tax break for nearly a year and appeared close to getting it in the $787 billion economic-stimulus plan. But at the last minute, Congress limited the five-year carry-back provision to firms with annual gross receipts of $15 million or less.

Analysts and some small builders worry the provision could prompt large builders to sell land or homes at steep discounts to generate losses for tax purposes, as companies such as D.R. Horton Inc. and Pulte Homes Inc. have done in recent months. A big labor union and other criticis have argued against the break, saying it would help the very builders that contributed to the housing crisis.

If the version in the Obama budget is enacted, the break is projected to trim federal revenue by about $18.5 billion over the next 11 years, according to the White House Office of Management and Budget. The tax break was dropped from the stimulus plan as part of an effort to lower the package’s cost to the Treasury, to appease Republican and Democratic centrists. Now that cost could be realized in the budget instead.

While the details of which companies would qualify for the latest tax break are being finalized, a spokesman for the White House budget office said its goal is to extend it benefits to “larger businesses” than those covered by the break in the stimulus plan.

The aftermath of a huge, only somewhat successful lobbying effort for both pro-housing stimulus and tax programs has led some big home building company senior executives to question whether the industry trade group can represent the often conflicting interests of large and small builders. [see previous post: Home Builder Trade Group Goes Public, or Rather, It Goes After Its Public Members].