ATLANTA (Reuters) – A dismal job market, a crippled real estate sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation’s leading economists said on Sunday.
Speaking at American Economic Association’s mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:
They are slim.
Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.
“It will be difficult to have a robust recovery while housing and commercial real estate are depressed,” said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.
Housing was at the heart of the nation’s worst recession since the 1930s, with median home values falling over 30 percent from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.
The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country’s growth pattern. The steep drop in home prices has also boosted their propensity to save.
“It’s very hard to see what will replace it,” said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. “It’s going to take a number of years.”
One reason is that U.S. consumers remain heavily indebted. Consumer credit outstanding has fallen from its mid-2008 records, but still stands at some $2.5 trillion, or nearly one-fifth of total yearly spending in the U.S. economy.
Another is that many of the country’s largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.
Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever “credibly” pulled away from its backing of the financial system, then a renewed collapse would likely ensue.
He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.
“There’s something of an illusion of profitability,” he said.
Once again, government isn’t the solution to our problem. Government is the problem.
Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research notes that “It will be difficult to have a robust recovery while housing and commercial real estate are depressed”. Yet we have the current White House implementing policies that are preventing the real estate market from reaching its bottom.
The Administration’s insistence on granting an $8,000 tax credit to first time home buyers is artificially preventing housing from reaching its natural bottom, much as Community Reinvestment Act banking policies created the problem by inflating a real estate bubble through artificial demand spurred by people who couldn’t possibly satisfy traditional, responsible mortgage requirements.
The Treasury said on Dec. 24, 2009 that it would provide an unlimited amount of assistance to Fannie Mae and Freddie Mac. According to Peter Wallison, a former general counsel at the Treasury: “The situation is they are losing gobs of money, up to $400 billion in mortgages”. The Treasury recognized last week that losses will be more than $400 billion when it raised its limit on federal support for the two, Wallison said.
You may remember, lax regulation of Fannie Mae and Freddie Mac led to the mortgage companies taking on too many risky loans in the first place.
Can you say “second verse, same as the first”?
Allowing the free market to dictate real estate pricing without government interference could be more painful in the short term. But it would take less time. If we accept Mr. Feldstein’s premise that a robust recovery will be difficult for so long as housing and commercial real estate are depressed, then implementation of policies which prolong the devolution of said prices means this Administration is delaying America’s economic recovery.
We got into this mess because government interference created a bubble that was impossible to sustain. Continued meddling by the government, creating phony demand that prevents reaching the bottom is only going to prolong the agony for every struggling business, household and individual.
If America’s going to experience robust economic growth the government’s simply going to have to get out of the way.