Obama and Romney Ignored Housing and Debt
President Obama and Gov. Romney keep saying they want America to get back to work, and yet they continue to ignore the biggest obstacles to economic recovery: housing market and private debt.
It was frustrating, though not particularly surprising, that over the course of the ninety-minute presidential debate last night the only reference to mortgages was a technical reference to the Dodd-Frank Act's troubled "qualified mortgage" provision-a requirement that the Consumer Financial Protection Bureau write a regulation ensuring lenders verify borrower income before issuing a loan. The President did make a single, passing reference to "housing," but it was only to mistakenly suggest that housing "has begun to rise."
There was no mention of Fannie Mae and Freddie Mac, who were major contributors to the housing mess that still plagues the economy.
There was no mention of bailouts for bankers who also contributed to the bubble with incompetent risk analysis that bet the farm on subprime mortgage debt, but somehow wound up escaping taking responsibility for their actions as Bear Stearns and Lehman Brothers were forced to do.
The sad reality is that both government housing policy and the culture of too-big-to-fail have been largely left untouched over the past four years, even though they were chief culprits in the financial crisis. It is understandable the President does not want to bring this failure up. But even Gov. Romney does not appear interested in discussing this topic at length.
Libertarians have grown accustomed to domestic issues like the war on drugs, LGBT rights, and abuse of executive privilege being ignored on the presidential stage. But it is impossible to divorce a discussion of housing policy from the debate over how to grow the economy.
Consider that households are not going to consume or save as long as they face the $13 trillion mountain of debt before them-and about two-thirds of that mortgage debt. Over 20 percent of mortgages in America are underwater, and nearly 12 percent of homeowners have missed at least one mortgage payment in the past 30 days. Ultimately, a lack of consumption means lower GDP and fewer imports. Lack of savings means less investment in the economy. What this means is that there is a direct relationship between private debt in America and weak economic growth.
That weak economic growth contributes to problems in the labor force, which in turn decreases productive output in the economy, and that cycles back around to putting downward pressure on growth. The way out of that cycle starts with the growth side, because a return to higher employment rates is always a lagging indicator of recovery. Step one has to be a decline of private debt; step 2 will involve financial institutions once again finding quality borrowers to fund and boost expansion of small businesses and entrepreneurship. And yet, the word "debt" was mentioned just five times in the first presidential debate, all in relation to the federal debt.
The only workable solution to the private debt problem is a combination of time and letting the toxic debt work out of the system as quickly as possible.
Household debt is not inherently a bad thing; the problem comes when it has grows to unsustainable levels based on government subsidization of lending (see housing subsidies and cheap money during the bubble years that led to the mortgage mess). Preventing more of that toxic debt from accumulating in the system through removing the housing subsidies-i.e., taking Fannie Mae and Freddie Mac out of unlimited taxpayer bailout conservatorship, reforming accounting standards at the Federal Housing Administration, and ending the mortgage interest deduction-is key to the deleveraging process. Letting the bad debt in the system quickly work its way off household balance sheets by letting the housing market fall to its natural bottom would also speed up the process so that the recovery can finally start up.
The fact is that housing prices are going to keep falling no matter what the government tries; it is just a matter of how long it takes.Mortgage rates are at an all time low with the Fed's quantitative easing policy pushing down rates and the taxpayer propped up Fannie Mae and Freddie Mac providing some 90 percent of financing to the mortgage market in America-but that just means interest rates are poised to eventually go up, and with them the price of mortgages, putting downward pressure on housing values. It might not be until 2015 or 5102, but it will happen.
At the same time, the coming foreclosure wave will put downward pressure on prices, an unfortunate fact we discussed in our September 1 column on these pages. About the only good news is that, while delinquencies are high, they are at their lowest rate since 2010.
The reality is that taxes, regulation, and health care are very important to the economy. But that doesn't mean they have to dominate the presidential debates. Gov. Romney could lower everyone's taxes, but that money is just going to pay down private debts before small businesses expand. Regulations should be reduced, particularly for occupational licenses, but this will just be a marginal gain until Americans are buying again. The point isn't that these other issues aren't important, but that the impact of tax reform, regulatory reform, or health cost reform will be subdued relative to those reforms coming along side housing policy reform.
During the 90 minutes that President Obama and Gov. Romney debated on Wednesday night, they could have found a few minutes to address these issues of housing and debt. Hopefully, this will not be an issue that escapes them at the second debate a few weeks from now.