You were close to some of the members of the economic team around Obama during the [2007-8] campaign. ... The housing bubble had basically burst already in 2007. What was the conversation within the campaign? ...

There were several problems going on simultaneously. ... One problem that no one could ignore was that we had gone into recession [in] December 2007, and unemployment was increasing. A question was, how deep would the downturn be? How [high] would the unemployment be? ...

What had precipitated the recession was the breaking of the housing bubble. ... In the years preceding the breaking of the housing bubble, a disproportionate source of growth in the United States was related to the real estate sector. Forty percent of all investments were in real estate.

But even more, Americans were using their house as a piggybank. In one year alone, almost $1 trillion was taken out in what were called mortgage equity withdrawals, and that was sustaining consumption. Savings rate had gone down to zero. It was clearly unsustainable.

And if the American household couldn't consume at that level, if they went back to what you might call a more rational, normal level of savings -- going from zero to 5 percent GDP or something like that -- that would be an enormous deflationary pressure on the economy. The economy would be pulled back.

So the housing sector was critical both for the economy and for the well being of most Americans. If the housing didn't recover, ... millions of Americans would lose their home, which turned out to be the case. ...

There was a third problem, and that was finance. The financial system had been excessively deregulated. ...

In the early days of the crisis, it was very clear that those in the financial sector, including those that were advising the president, wanted to pretend that there was just a little bit of a perturbation in the housing market. It had gone down; it'll go up again. It was just a temporary aberration.

But those of us who looked at the data, people like Bob Shiller who studied the housing market, said no, there'd been a bubble. You've been living in fantasyland, and the price declines that you've seen are not going to be reversed any time soon.

Unfortunately it appears as if the Obama administration paid more attention to those who were the dreamers that the market would come back [than] to the realists who said no there'd been a bubble, and you've done some pretty bad lending, and now you're going to have to face the consequences.

Now we're four years after the breaking of the bubble, and housing prices are still 30 percent, 35 percent below what they were at the peak. Some places 50 percent. In some areas housing prices are continuing to fall. So that was a very fundamental misjudgment that had implications for everything that went on after.

One of the implications was they never put together a program to address the Americans who were losing their homes. They never did very much to stop the foreclosure movement. A small program, $75 billion was set aside, $2 billion was spent to help homeowners. It was clear that it wasn't given the priority. ...

That led to what?

That had both economic and political consequences. The political consequences were that a very large fraction of America came to the view that the Obama administration was on the side of the bankers and not on their side. How can you give all that money to the bankers who caused the crisis and not help a lot of ordinary citizens who were the innocent victims of predatory lending, of all these shenanigans? ...

Many of these homebuyers were first-time homebuyers. They took out the mortgages on the advice of the mortgage brokers, of the people in the financial sector. They sold them these financial products that exploded.

Now you could come to one of two conclusions: Either that the financial sector didn't know what it was doing, or the financial sector was out to maximize transaction cost, maximize their profits, and exploit the innocent homebuyers.

Which side do you fall on?

Both. I think actually they didn't really understand risk. We've seen that over and over again. They called themselves experts on risk; they didn't understand it.

But the thing is, they're profit-making organizations. They were out to maximize profits, and they saw some people who they could exploit. ...