Tonight the President will address a joint session of Congress, and millions of us will be watching closely, just as we did last night for the GOP debate — and here’s something to listen for.

The most important policy issue of all, which has so far been largely ignored, is the necessary resolution of the U.S. housing market, and the needed help for not only the 1 in 5 homeowners underwater in their mortgages, but for the mispricing and overladen debt that is associated with all of it.  So many economic minds agree — so many, from different aisles — that the only way to do this is to write down the mortgage debts that homeowners cannot and will never be able to pay.

This is something that bank-friendly politicians (and for that matter, the media) have been reluctant to even discuss, thinking of it as “the elephant in the room.”  As we detailed in a Huffingon Post piece earlier today, it looks like there’s at least one GOP presidential candidate speaking our language.

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.

Yes, that was Mitt Romney on mortgage write-downs.  (Ed. note: Let’s not forget we also need regulatory reform, capital requirements, maybe swaps on an exchange — but this is a start!)   As you know we have not always agreed with Mitt Romney, but the fact that a leading Presidential candidate for the Republican party is currently forcing the issue into public discussion.  That’s a good sign for all of us.  Now, we need to see if the President himself will come up with his own plan to resolve the incredible problem that American housing is — and will remain — until it is resolved.

VIDEO: Dylan talks to New York Governor and Attorney General Eliot Spitzer and former Chief Economist at the International Monetary Fund, MIT’s Simon Johnson.

Here are some behind the scenes photos of today’s segment:

Photos by digital producer @MegRobertson.

TRANSCRIPT

Dylan: Good afternoon to you. I am Dylan Ratigan. And the big story today is, of course, the White House and Your House. In just five hours, the President will give all of us his State of the Union address. It will be given, of course, before a joint session of Congress. Millions of us will be watching closely just as they did last night to the Republican Presidential candidates debating in Florida. And here’s something to listen for—the most important policy issue of all, which has so far been largely ignored, is the necessary resolution of the U.S. housing market and the needed help for not only the one in five homeowners under water in their mortgages, but for the mispricing and overladen debt that is associated with all of it. So many economic minds agree, serious minds from different aisles, that the only way to do this is to write down the mortgage debts that homeowners cannot and will never be able to pay. This is something that bank-friendly politicians and, for that matter, the media have been reluctant to even discuss. Think of it as the elephant in the room until now.

Romney: 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 and write those down and start over. They keep on trying to harangue and pretend that what they have in their books is still what it’s worth.

Dylan: Yes, that was Mitt Romney speaking our language, except that we also, of course, need some regulatory reform, capital requirements, maybe swaps on an exchange to make sure it never happens again. As you know, we have not always agreed with Mitt Romney, but the fact that a leading, the leading Presidential candidate for the Republican Party is currently forcing this central issue is a remarkably good sign for all of us. Now, we need to see whether the President himself will come up with his own plan to resolve the incredible problem that American housing is and will remain until it is resolved.

We begin with a sheriff of Wall Street, former New York Governor and Attorney General, Eliot Spitzer, along with former Chief Economist at the International Monetary Fund, Simon Johnson, who is now working with the campaign for a fair settlement. And it’s nice to see both of you. Simon, why is resolving housing central to the economic – the economy’s function?

Simon: Well, housing is wealth for most Americans, Dylan. That’s where people put their savings that when they’re underwater on their mortgages, it means they’re worried about their future, the future of their children, they’re not going spend. Without consume spending, we’re also not going to get investment, of course, the economy is going to be slow. You’re not going to get the jobs back. It’s the key to the entire puzzle at this moment.

Dylan: At the same time, Eliot, how do you get around, you know, “Listen, if they couldn’t afford it, they shouldn’t have paid it. Why should we let them off the hook,” moral hazard, on and on?

Eliot: Look, Dylan, that is right. We should not reward those who borrowed too much. On the other hand, we’ve already bailed out all the banks, we excused their moral hazard. We’re not doing this to justify the misbehavior; we’re doing it as Simon just said and you have just said, for the fate of our economy. Housing stock is the single greatest asset for most Americans. We’ve got to resolve that issue if we’re going to get the economy moving forward again. And there’s a way to do it that doesn’t give them, them the homeowners, the upside if housing market rebounds too quickly. Give some of that upside to the banks, those who took the risk, there are many ways to do it, but we’ve got to…

Dylan: So you could restructure, so make me the homeowner, you could write down my debt and then say if there’s home price appreciation that the benefits of that appreciation accrue to the bank as opposed to the homeowner.

Eliot: Or you divide it – or to taxpayers, whomever. There’s so many way to do it, but the critical point is the one Simon said, that’s where the wealth is for so many consumers. Unless we stabilize that market, the economy will not come back.

Dylan: I want to play a little bit more from former Massachusetts Governor, current Republican aspirant, Mitt Romney. Take a listen to this.

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

Dylan: Your thoughts on what Mr. Romney has to say.

Simon: Very nicely articulated. There’s a so-called Zombie Bank phenomenon. The banks are pretending that the assets are okay, that people can pay their mortgages so they don’t have to recognize the losses, they don’t have to square up with their shareholders or maybe with their creditors and that the best thing to do is to draw a line and say, “No, these mortgages have to be written down,” you made a bad mistake, poor business judgment. Maybe there was some legal wrongdoing, too—by the way, that needs to be investigated—definitely bad business judgment, and then the banks can move on and also the homeowners can move on—resolution of the mortgage debt overhang.

Eliot: Look, Dylan, we are living with a great myth right now. The myth that the banks really return to solvency because we are all putting on blinders. If there were really mark to market of all the assets…

Dylan: What does that mean?

Eliot: In other words, they have not, as Governor Romney just said, former Governor Romney just said, the banks have not written down to the actual value all the mortgage debt they’re carrying in the residential housing market. If they did that, then all of this stress test stuff would show that they really are still in very bad shape. Now, everybody’s hoping “just hold on for another two or three year, it will come back, we can pretend it didn’t happen,” but it may not come back given what we still see in the housing market.

Dylan: And what is it about doing whether it’s what former Governor Romney, whether it’s what you’ve been saying really since this crisis emerged, what you’ve been saying since this crisis emerged, largely what myself and many others have been asking about since this crisis emerged. It is the elephant in the room and yet we have not seen a consequential resolution proposed by the Democratic Party or the President. More importantly, or as important, we have not seen his political opponents say, “You have to do this, we need to resolve this,” which allows the President and the Democrats, obviously, not to do it. What are they afraid of?

Eliot: Well, they’re afraid, I think, of the reality that if you actually wrote that debt down, we would realize that we still have banks, as Simon just said, Zombie Banks that really don’t have a fiscal condition sufficient to carry us forward. The “why” behind this, and this is the ideological division that I’ve had with Secretary Geithner and before that, as well, Larry Summers, at the very beginning when the President had the leverage to impose this resolution, he did only this half of the deal the banks wanted, not the half they didn’t want. The half they didn’t want was the write-down. They half they wanted was all the cash we gave them.

Dylan: I want to talk to you about what you’re doing right now, this campaign for a fair settlement. There’s lots of talk about trying to create basically a safe harbor for the banks. If we can get the banks to agree to pay $10-$20-$30 billion for housing, then we will exempt them from all future liability. Why is that a bad idea?

Simon: Oh, it’s a terrible idea, Dylan, because if the war is legal wrongdoing by the banks, and there’s plenty of evidence suggesting that but it hasn’t yet been proven, then there should be a legal settlement, but it’s got to be a lot bigger than what is currently on the table.

Dylan: Why? How do you determine the scale?

Simon: Well, you need an investigation; you need to understand what was done wrong and who was damaged. You need to assess on that basis, but the moment – they’re just talking about robo-signing, it’s like damages in the range of $20-$25 billion. That’s peanuts relative to the problem. And if in return you give some sort of blanket indemnity or waiver to the banks…

Dylan: Safe harbor.

Simon: …a safe harbor, that’s a disaster because then Attorney Generals in New York and other states can’t pursue them. What you really need is the state level officials working with the federal officials to have a joint investigation of all the troubled banking practices and settle, if you’re going to settle, on that basis.

Dylan: So let’s presume that there was a meaningful group of policymakers, bank executives, Treasury executives, etc., that say, “Listen, we’re going to do a meaningful resolution of mortgage debt.” The meaningful resolution of mortgage debt will be highly disruptive to some banks, perhaps less disruptive to other banks. Do we have the mechanism to go through that process and reform the disruptive banks in a way that services our economy? Have we done this before? Could it be done if we had to?

Eliot: Look, I think we did it two years ago. In other words, if you can put enough Band-Aids over those banks that are going to really suffer, and some of them would if you actually dug into the value of the mortgages they’re carrying on their books, we can get through that. But I think what Simon is saying, what many of us have been saying, you can’t put the cart before the horse, give them the immunity, agree upon a number until you know what the actual magnitude of the damage has been. The other thing I would add on top of this, Simon, is force them to release all of their internal documents so we know the truth about what happened. We basically own these banks, we save them, we bail them out, it was our capital at risk, it is still our capital at risk because we’re standing behind them. Say to them just as I think we should have said to AIG way back, “Release all the emails so we know what your dynamic was with regulators, with your investigators, what you knew, and then we can make a judgment.”

Dylan; I want to end on the Romney commentary. It’s interesting that we have someone who is in the middle of the mainstream political debate, that his is a significant contender, obviously, to run for the office of President of the United States for the Republican Party. What can we all do to help encourage, not only former Governor Romney, but current President Obama and any other Presidential aspirant to adopt this type of thought? They may not like our particular ideas, but at the very least to have the integrity to demand the investigation before they go resolving anything. That’s a question for both of you.

Simon: Well, the campaign for fair settlement is exactly about this, Dylan, and it’s an umbrella under which there are many people who might have different versions of exactly what you should do, but don’t settle with the banks with small fine, big legal indemnity. That’s a disaster. You need a proper, full investigation. That’s what Eric Schneiderman’s asking for in New York, that’s what Beau Biden in Delaware’s asking for. Other Attorney Generals are on board. The President needs to get on board and needs to be asking for that. Hopefully, this evening, certainly going forward, this needs to be the message coming out of the White House.

Dylan: Last word.

Eliot: You know, I think Simon got it right. I think we need to stand behind those AGs, state AGs who are saying, “No, don’t settle before we investigate, make sure we get the right number, and let’s make sure.” The objective here, again, save homeowners and our economy enough of a write-down of the face value of the principle of these mortgages so the economy can move forward again. That’s what we’ve got to care about.

Dylan: The gateway to prosperity comes through the courage to resolve the barrier to that prosperity.

Eliot: Why didn’t I say it that way?

Dylan: Listen, this is it. I’m running for Cable Guy over here. You can’t win Cable Guy if you don’t come up with that sort of thing once in a while. It’s a delight to see you and you, Simon. Thank you very much, Eliot. It’s always a pleasure. If you want to learn more, we have just posted a blog on the Huffington Post co-authored with Eliot on Mitt Romney’s State of the Union Challenge on the mortgage crisis, whether he intended it as such is unclear, but he said it and it gives us an opportunity to learn more about it and talk about it. I hope you will do the same.