Today, more the two years after the official start of the recovery, we find ourselves mired in slow growth and high unemployment. The majority of Americans cannot distinguish between this recovery and stagnation, if not continued recession. One question is why the economy is performing so much worse than in the previous post-recessionary periods since World War Two. And once we think we have an answer to that question, we have another: What is to be done?
Economics is the obvious place to turn for answers. But, despite the impressive gains in the field over the past century, economic policymaking (like the rest of public policy) remains more art than science. We try to find the best way forward without being certain that our efforts will produce the hoped-for outcome. Even if the weight of evidence, argument, and common sense leans strongly in one direction, skeptics who look for countervailing considerations can almost always find them. So let me begin an argument that will lead to specific policy recommendations by stating as clearly as I can what is most probably true about the circumstances in which we find ourselves.
First, it is likely that Carmen and Vincent Reinhart are right: We are now enduring the aftermath of a financial crisis, which differs qualitatively from cyclical downturns and typically requires much more time to recover. In a recent paper, “After the Fall,” the Reinharts look at 15 post-WWII single-nation financial crises and three global contractions—the Great Depression of 1929, the post-1973 oil shock, and the 2007 U.S. subprime collapse. Their survey includes five advanced economy crises: Spain (1977), Norway (1987), Finland (1991), Sweden (1991), and Japan (1992). Here are their principal findings:
When we place U.S. economic trends since 2006 into this historical context, the current downturn looks about average for financial slumps—less severe in some respects, more so in others. Though alarming, the sharp decrease of 55 percent in stock market indices that bottomed out early in 2009 was par for the course, as is the steep rise in the public debt-to-GDP ratio. And, if history is any guide, we may be only halfway through the period of debt reduction and slow growth.
Second, compared to other financial crises, distorted household balance sheets are more central. Household debt surged from 65 percent of disposable income in 1980 to 133 percent in 2007. At the core of that surge was the enormous escalation in mortgage indebtedness. When combined with a bubble in housing prices, withdrawal of equity from homes enabled a level of consumer spending that could not be sustained and that left household balance sheets in tatters when home prices receded. This effect has been huge: The most recent Case-Shiller index revealed that housing has already fallen as much from its peak as it did during the Great Depression. And there’s no guarantee that we’ve hit bottom yet. Prices could decline another 5 percent to 10 percent, millions of homes remain at risk of foreclosure, and millions of others are in earlier stages of delinquency that could lead down the same path.
Third, the pace and extent of this jarring decline in the housing sector is affected by public policy. A recent paper by Atif Mian, Amir Sufi, and Francesco Trebbi showed that, in states with foreclosure laws that favor creditors, foreclosures occur more frequently and rapidly, more homes are thrown on the market, housing prices decline more, and the pace of new home construction is much slower. In the aggregate, these effects are highly significant: The authors estimate that foreclosures have been responsible for 20 percent to 30 percent of the decline in housing prices, 15 percent to 25 percent of the decline in residential investment, and 20 percent to 35 percent of the decline in auto sales.
Assuming the validity of these three premises, one would have expected the incoming Obama administration to have given the housing sector a high priority and to have offered dramatic proposals for stabilizing it, all the more so because candidate Obama showed an acute awareness of this issue. On September 16, 2008, as the financial crisis intensified, Obama vowed to “change our bankruptcy laws to make it easier for families to stay in their homes.” But, as investigations by ProPublica have shown, both the Obama campaign and his administration missed (critics would say rebuffed) numerous opportunities—including the TARP legislation and the stimulus package—to do what Obama promised. Instead the end, we ended up with all-but-toothless voluntary programs that predictably have fallen far short of their goals for mortgage modifications.
This sounds more right than the stuff you typically serve up.
But be warned: your new prism/paradigm is an almost-but-not-quite depression that was only (!) a recession because we acted in time. If getting the economy moving again is our #1 goal (after, you know, impeaching Mitch McConnell) and you have it on historically informed economic authority that unemployment stays high for years, then our best solution becomes FDR-style fiscal policy. (Because that actually lowered unemployment 4% in a terrible worldwide economy.) Really, Keynes is what we were going for all along, just way too timidly. I think there are structural forces afoot, but the US is not accustomed to Eurosclerosis. So while ... view full comment
This sounds more right than the stuff you typically serve up.
But be warned: your new prism/paradigm is an almost-but-not-quite depression that was only (!) a recession because we acted in time. If getting the economy moving again is our #1 goal (after, you know, impeaching Mitch McConnell) and you have it on historically informed economic authority that unemployment stays high for years, then our best solution becomes FDR-style fiscal policy. (Because that actually lowered unemployment 4% in a terrible worldwide economy.) Really, Keynes is what we were going for all along, just way too timidly. I think there are structural forces afoot, but the US is not accustomed to Eurosclerosis. So while it is great to have a plan for getting our finances in order over the medium-term, that can only happen if we have a growing economy, as that will do half the work of deficit reduction from our current perilous state.
I think these are good ideas, and I wish the administration would pursue them, but would they make their way through Congress? That might be the challenge.
But, the President has to be willing to take some heat.
I think these are good ideas, and I wish the administration would pursue them, but would they make their way through Congress? That might be the challenge.
But, the President has to be willing to take some heat.
Better to learn wisdom late than never at all. But I have to ask: where were you two and a half years ago when these policy proposals were considered and rejected? Of course, looking for guidance in the rear view mirror takes little foresight or imagination. Other debtor proposals considered included allowing debtors to tap into their IRAs without paying the early withdrawal penalties. But Obama and his advisors rejected most every proposal for relief of debtors and chose instead to focus all the relief on creditors; you know, the creditors, the ones who created the mess. Maybe Galston was running around with his hair on fire back then, shouting "help the debtors, save the homes!", but ... view full comment
Better to learn wisdom late than never at all. But I have to ask: where were you two and a half years ago when these policy proposals were considered and rejected? Of course, looking for guidance in the rear view mirror takes little foresight or imagination. Other debtor proposals considered included allowing debtors to tap into their IRAs without paying the early withdrawal penalties. But Obama and his advisors rejected most every proposal for relief of debtors and chose instead to focus all the relief on creditors; you know, the creditors, the ones who created the mess. Maybe Galston was running around with his hair on fire back then, shouting "help the debtors, save the homes!", but I don't think so. Now it's too late, as the horse has already left the barn. I suspect the only remaining policy option is inflation, an option that can be implemented without having to go through a totally dysfunctional Republicans in Congress. My prediction: two years from now Galston pens another essay this time proposing that the Fed loosen the reins and generate some inflation to help debtors. Unfortunately, as the Bair interview in last week's Sunday Magazine confirms, economic policy (including monetary policy) is dominated by and for the bankers and bond holders (creditors), so I expect no relief, now or then, for debtors that might come at the expense of creditors.
How do you estimate market value in a rapidly declining market environment? It can only be a temporary snapshot of value, as of the date of the appraisal. A month after the appraisal is made, the local market could lose another 10-15% of value. It is clearly a race to the bottom, in many US markets, but not all markets. Loan-to-Value ratios are an illusion.
While the most prominate of the appraisal organizations wines and dines members in luxury Las Vegas casinos, all for the goal of its member's 'continuing education,' the average American homeowner is being marched off to the slaughterhouse of financial ruin.
Galston's article does not broach the thorny subject of the MERs fiasco. MERS is a ... view full comment
How do you estimate market value in a rapidly declining market environment? It can only be a temporary snapshot of value, as of the date of the appraisal. A month after the appraisal is made, the local market could lose another 10-15% of value. It is clearly a race to the bottom, in many US markets, but not all markets. Loan-to-Value ratios are an illusion.
While the most prominate of the appraisal organizations wines and dines members in luxury Las Vegas casinos, all for the goal of its member's 'continuing education,' the average American homeowner is being marched off to the slaughterhouse of financial ruin.
Galston's article does not broach the thorny subject of the MERs fiasco. MERS is a confidential electronic registry that banks helped create in 1997 in order to keep track of mortgage paperwork. MERS saved the banks time and money by providing a private, electronic alternative to the public system used by local government recorders. By using the MERS registry, they largely avoided the recording fees and taxes. In most States it is now impossible to know, from the public record, who owns the mortgage debt. The recordation of mortgages has been taken out of the hands of the government (i.e. the people) and placed in private, secret and unregulated hands.
Why was MERS allowed to undermine hundreds of years of safe, accurate recordation of mortgage documents? Judges are refusing to honor MERS and are beginning to throw out defective and dishonest foreclosure cases across the nation.
Who owns what is seriously in question.
Here's another idea, for the slightly longer term: Marry Millennials desire to own homes with policies that make it financially possible for them to do so. See http://ndn.org/blog/2011/07/are-millennials-solution-nation%E2%80%99s-ho...
Here's another idea, for the slightly longer term: Marry Millennials desire to own homes with policies that make it financially possible for them to do so. See http://ndn.org/blog/2011/07/are-millennials-solution-nation%E2%80%99s-ho...
No more Galston criticism from me. It's either low hanging fruit or the guy does have something. Two and a half years ago few knew the depths of the recession to come, in particular the public whose support is essential for any major policy initiative. Today, even a monkey knows we are in deep trouble. For millions of homeowners, some still facing foreclosure, but many more facing the loss of their nest egg, it's now clear that we are in crisis. So no better time than now to propose the types of measures suggested by Galston. Timing is everything, and Galston does have timing.
No more Galston criticism from me. It's either low hanging fruit or the guy does have something. Two and a half years ago few knew the depths of the recession to come, in particular the public whose support is essential for any major policy initiative. Today, even a monkey knows we are in deep trouble. For millions of homeowners, some still facing foreclosure, but many more facing the loss of their nest egg, it's now clear that we are in crisis. So no better time than now to propose the types of measures suggested by Galston. Timing is everything, and Galston does have timing.
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