It’s the Housing Bubble, Stupid!

A few years ago, we had a housing bubble. Have you heard? Apparently, many writers haven’t.

Check the major newspapers. Everyone is writing about the economy. For almost five years now, they’ve been predicting strong economic growth just around the corner. And for almost five years, they’ve been wrong. Stumped. Surprised.

The recession ended three years ago, they say. How can unemployment still be so high? How can growth be so slow?

So they make up explanations, usually political. Their economic models failed. Their credibility is in doubt. They must blame someone else. So they blame the government.

Taxes are too high, they say, even though taxes are lower than they were before the recession. Regulations are too strict, they say, even though corporations are making record profits. The stimulus slowed growth, they say, even though it created or saved over 3 million jobs.

And they never mention the housing bubble. Even though everyone and their dog knows that the collapse of the housing bubble caused the recession.

From the end of World War II to the late 1990s, housing prices tracked inflation. There were booms and busts in the 1970s and 1980s, but they always came back to the same long-run average. Then, from 1998 to 2006, they rose approximately 90 percent, after adjusting for inflation. They’ve been falling ever since.

Real housing prices are now about 10 percent above their long-run average, as is the price-to-rent ratio. Which means they still have further to fall, but we can finally see the light at the end of the tunnel.

If you’ve taken Econ 101, you’ve probably heard of the “housing wealth effect.” It says that, for every dollar that housing wealth declines, consumption shrinks by 5 to 7 cents. Since the peak of the housing bubble, we’ve lost almost $8 trillion in housing wealth. That’s $400 to $560 billion less consumption. And that doesn’t include indirect effects, like the resulting stock market decline, which lost another $4 trillion in wealth.

It takes an even bigger chunk out of overall output when you add residential investment, which fell 24 percent in 2008, 22 percent in 2009, and 4 percent in 2010.

Given that knowledge, it’s hard to imagine anyone predicting a strong economic recovery while housing prices still have further to fall.

But the housing market is improving. Residential investment has started to grow again, as has construction employment. Whereas there was a huge glut of unsold homes in 2009, that inventory is almost back to normal levels. Existing home sales have been increasing for the last six months, though new home sales are still stuck near their post-recession low.

The decrease in unemployment is what everyone is talking about, but it’s mostly due to people dropping out of the workforce — being so discouraged that they stop looking for work — rather than a significant increase in jobs. The number of job openings was unchanged in November. 200,000 new jobs in December may sound like a lot, but it would take 100 more months just like it — that’s 8 years — to return to full employment.

A lot is riding on a turnaround in the housing market, including Barack Obama’s re-election. If the administration wants to increase its odds of staying in the White House, it’s not taxes or regulations or government spending that need easing. It’s struggling homeowners.

They can start by appointing an FHFA director who will encourage borrowers with government-backed loans to refinance at lower interest rates. And they need to be more aggressive in investigating widespread mortgage servicing fraud at major lenders.

We are nearing the end of the Great Housing Bubble. It has gone up, and now it’s almost done coming down. Let’s hope we learned our lesson…at least for a little while.


This op-ed was published in yesterday’s South Florida Sun-Sentinel.

A Failure to Communicate, Not a Failure to Stimulate

It’s a little difficult to reply to Prof. Mishra’s latest op-ed because it doesn’t really have a point. It goes all over the place. As far as I can tell, the only actual argument he makes against President Obama’s American Jobs Act is:

…the first stimulus bill in 2008, a $700 billion package geared toward government spending to stimulate the economy, and financed with borrowed money, has obviously failed to create new jobs.

He never offers any evidence to support this claim.

I’ve disproven this hypothesis before, but I’ll do so again — first by repeating what I said last time, then with even more evidence. If you’ve already read the first part, you might want to skip to the new stuff, though it can’t hurt to refresh your memory…   Continue reading “A Failure to Communicate, Not a Failure to Stimulate”

Don’t Blame the Fed for Holding Back the Recovery

Rick Perry must not spend much time in banks.

How else can you interpret his accusation that Ben Bernanke, the Chairman of the Federal Reserve, “is almost treasonous” for “printing money”?

He must think that banks spend every dollar they get from the Fed. He must think that banks depend solely on the Fed for funding. Because that’s the only way that “printing money” — if that’s even what you could call what the Fed does — could result in any damage for the United States.

Rick Perry lives in the Bizarro World of Banking.

Here on Planet Earth, U.S. banks are holding $1.6 trillion in excess reserves. That’s $1.6 trillion that they’re not spending or loaning or investing. It’s just sitting there. Not doing anything for the economy.

Just to give you a little context, before this recession, excess reserves had never been higher than $20 billion.

In other words, most of the money that Perry is so angry about is just minding its own business. Nobody is spending it. Nobody is borrowing it. It’s not contributing to inflation or the depreciation of the dollar. It’s not eroding your purchasing power.   Continue reading “Don’t Blame the Fed for Holding Back the Recovery”

Why Jon Huntsman Is More Dangerous Than You Think

If you’ve been reading this blog over the last couple days, you have a good idea what Michele Bachmann and Jon Huntsman stand for. We hope to continue that series throughout the campaign, if only because most Americans go to the polls without the faintest clue of where the candidates stand on the issues. You now know, for instance, that Bachmann is a delusional bigot with little interest in public policy other than to turn America into a quasi-theocracy. You might think she’s the one you should be afraid of. You’d be wrong.

Bachmann is too extreme to be elected president. Even if the Republican primary voters completely lost their minds and nominated her, she’d lose the general election by a landslide, even in her home state of Minnesota.

Huntsman, on the other hand, is a very good match for President Obama. He’s moderate, handsome, polished, and well-spoken. His positions on Afghanistan, Libya, climate change, gun rights, the national debt, and gay marriage line up directly with the public’s opinions. (It’s almost as if he’s just saying what the public wants to hear. Naw, politicians don’t do that…) If he can overcome the powerful extremists in his party, you might consider voting for him.

That’s what makes him dangerous.   Continue reading “Why Jon Huntsman Is More Dangerous Than You Think”

What to Read on Inflation

Commodity Rout Lends Credence to Bernanke’s Inflation Outlook — Michael S. Derby

Worries the U.S. recovery may not be as strong as expected signaled to many investors it was time to re-price oil for lower demand, and other commodities followed suit.

All in all, it looks as if Bernanke’s oft-repeated view that the commodities surge, driven by supply shocks, political forces and overseas growth, may indeed be “transitory.”

A Commodity Peak? — Paul Krugman

But why, exactly, is this such a surprise?

Some of this probably represents a long-term upward trend, as emerging economies place pressure on limited resources, but even so, you wouldn’t expect continued rapid rises, and in fact you should expect some regression toward normal levels as supplies and to some extent demand respond.

Resources, Inflation, and Monetary Policy — Paul Krugman

Well, the San Francisco Fed tells us that commodities account for only about 5 percent of personal consumption…

Visualizing Priorities — Paul Krugman

A naive observer might note that interest rates are low by historical standards, making you wonder why we’re obsessing about the bond market; that inflation is also low by historical standards, making you wonder why it’s an issue at all; and that unemployment is immensely high. But Washington has its priorities.

More Fun with Prices — Paul Krugman

Runaway inflation! Or, maybe, not.