Why the Value of Your House Moved Global Markets This Week

Why the Value of Your House Moved Global Markets This Week

August 26, 2010

This week’s housing news was a primer on globalization. U.S. existing home sales fell 27 percent in July, twice as sharp a drop as Wall Street analysts said to expect. (Of course, they’re the same geniuses who didn’t see their own meltdown coming; didn’t expect the long, deep recession that followed; and couldn’t figure out that the recovery would be slow and halting.) Right away, our stock markets sunk by one to two percent — no surprise there — but we weren’t alone. On Wednesday morning, the financial news led with “European Stocks Drop on Dismal U.S. Home Sales Data” and “Most (Asian) Stocks Fall Amid Speculation on U.S. Home Sales Report.”

Why does a bad report on American home sales rattle investors a half-world away? To be sure, housing is an important piece of every U.S. recovery. And the world pays close attention to ours, since we remain by far both the world’s largest market for imports and the place where most foreign multinationals maintain their subsidiaries. This time, however, there’s more at stake. Housing is both a lynchpin for a full recovery from the financial crisis that pushed most of the world to the brink of depression; and the key to something better than our current stumbling expansion.

The link to finance is straightforward. Everybody remembers how Wall Street’s largest institutions swooned or crashed when the end of the housing bubble brought down hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that backed them up. But when Washington stepped in to rescue most of them, it took out its own risky bet that a housing recovery would quickly stop the bleeding. So we never seriously considered what Sweden did so successfully in the early 1990s — and what we did ourselves to resolve the S&L crisis: Take over an insolvent Bear Stearns, AIG or Merrill Lynch, pull out the weak and failed assets, and sell the still-healthy stuff to new investors who would promptly reopen the institution under a new name. And the bailouts didn’t even require that these institutions put their books back in order by getting rid of the most risky housing-based assets which they still held.

The catch is that if the housing market continued to deteriorate — as it did — more of those assets would decline in value or fail outright. Those losses, current and prospective, leave finance much less willing to lend to most other companies. And that means that strong business investment, which is a critical part of all healthy expansions, this time will follow a housing recovery, not lead it.

There’s more at stake in the current housing market than the pace of business investment. Some 70 percent of U.S. households are homeowners, which makes housing values the most important piece, by far, of most Americans’ wealth and economic security. So, the sharp drop in those values has made most of Americans poorer than they had been; and, unsurprisingly, people who feel poorer tend to spend much less. The health of the housing market, in short, now directly affects both business investment and consumer spending, and with them the outlook for the entire U.S. recovery.

It’s little wonder that world markets reacted badly to this week’s dismal U.S. housing report. Beyond the 27 percent drop in existing home sales — and one day later, sales of new homes also fell sharply — nearly one-third of the houses that did sell were “distressed” properties. That means they were either in foreclosure or sold for less than their outstanding mortgages. Average home prices did inch up a little bit, but the only reason was that the end of the temporary tax credit for first-time homebuyers led to a particularly sharp fall in their purchases, which normally involve lower-priced homes.

Nor are there signs of a real housing recovery anytime soon. Foreclosures are still running at four times their normal levels — and nothing drives down a neighborhood’s housing prices and slows down sales more than nearby homes in foreclosure. On top of that, supply continues to way outpace demand: At current rates of home sales, it would take over a year to clear all of the homes already on the market today.

If we don’t take serious steps to finally turn around these conditions, the United States and much of the rest of the world will be looking at a weak expansion, or worse, for several more years. One measure that could have a powerful effect would be steps to bring foreclosure rates down to normal levels. For example, congressional Democrats could advance a new program modeled on student loans for homeowners with mortgages in trouble. Homeowners who qualify could borrow the funds they need to stay in their homes, at a low interest rate, with no interest due the first year so long as they stay in the homes for at least two more years.

Most Republicans will denounce it as just another “big government program.” Yet, without a housing recovery, the alternative is not only smaller government but also a smaller economy, because businesses can’t find loans, people can’t find jobs, and most consumers can’t spend like they used to.

How to Remain the Number One Economy as China Ascends to Number Two

August 18, 2010

The news that China’s GDP will surpass Japan’s this year, making China the world’s number two economy, raises important issues for the United States.   There’s no prospect of China taking over the number one slot anytime soon:  Even in our present shape, the United States will produce at least $14.3 trillion in goods and services this year, compared to China’s $5.3 trillion.  But the Sino-Japanese shakeup in global economic rankings is a sign that America has to raise its game.

The real lesson here comes less from China’s ascendance than from Japan’s decline.  Twenty years ago, Japan had racked up 30 years of extraordinarily rapid growth – just as China has today – and scaremongers predicted that Japan soon would overtake us.  Yet Japan’s good times ended abruptly in 1991, ushering in two decades of economic stagnation.  And the origins of that long downward slide should seem all too familiar to Americans, since it began with the sudden collapse of a huge real estate and stock market bubble, which then triggered a banking crisis and deep recession.

Sweden had a financial meltdown the same year as Japan; yet Sweden put together a new policy consensus around economic liberalization and the economy came roaring back within three years.  On the other side of the world, Japan suffered through year-after-year of policy mistakes and paralysis by its long-ruling Liberal Democratic Party, producing two decades of economic languish.  The particulars of Japan’s decline should make our public officials squirm: Hemmed in by powerful interests and an irresponsible opposition, the LDP couldn’t bring itself to clean up the country’s banks or fix the housing market, much less undertake deeper economic reforms to prepare Japanese businesses and workers for globalization and its intense competition.  So, Japan was left instead with years of financial-sector weakness that limited business investment – sound familiar? – especially for the new enterprises that drive technological innovation and job creation.

As Japan continued to falter economically, the LDP sank trillions of yen in new public projects – and almost nothing to reform their economic policies or upgrade the skills of Japanese workers, especially millions of women consigned to positions that have no future in a modern, idea-based economy.  The result has been prolonged economic stagnation, and faltering competitiveness even for its global companies.  From 1990 to 2005, for example, Japan’s share of the world market for producing high-tech goods collapsed from 24 percent to less than 15 percent.

The question for us is whether our own political system has the capacity to address challenges here that echo Japan a generation ago.  We may not face the prospect of a national economic reversal as severe as Japan’s, and our world-class corporations should continue to prosper.  Yet, we face serious challenges of our own which, if left unaddressed by Washington, could leave a majority of ordinary Americans facing economic stagnation for a generation.

At the top of this catalog of challenges are jobs, because the storied capacity of America’s companies to create new jobs has eroded badly.  In the Bush expansion of 2002-2007, our private sector generated less than half as many net new jobs, relative to growth, as we did in the Clinton expansion of the 1990s, the Reagan expansion of the 1980s, and even the Carter expansion of the mid-to-late-1970s.  The best policy response is to reduce the cost to businesses of creating those new jobs.  We also know just how to do that – cut the employer’s payroll tax burden for net new hires, and slow future increases in the health care costs which they have to pay.

The outstanding question, however, is whether Washington can raise its game and enact these reforms. Let’s frame the political challenge in the terms that dogged economic reform in Japan for a generation.  So, can congressional Republicans accept a tax increase, even one designed to fund a corresponding payroll tax cut?  Optimally, the tax increase could contribute something on its own – for example, a carbon fee that also would help address our energy security and climate change.  For the other side of the aisle, can Democrats find a way to support a tax cut for business, even if it’s the most effective way to spur job creation?  Similarly, can Republicans swallow hard and support more regulation of our broken health care market, in order to reduce costs for business – and are Democrats prepared to trim federal outlays for powerful health-care interests if doing so will ultimately help create jobs and raise wages?

Here’s another challenge we will have to meet to avoid a version of the Japanese disease: Restore higher levels of domestic savings to support and promote higher levels of both private investment and public investments, especially in education and training, and in 21st century infrastructure including universal broadband and a modern electricity grid.  We now know, after two generations of trying, that tax breaks aren’t enough to convince most Americans to save more.  Since the 1990s, we’ve provided generous tax breaks in various forms that cover 80 percent of all personal saving, all to no avail.  The only certain way to raise national savings, it appears, is to reduce public dissaving, through lower budget deficits.

Facing an economic slowdown that could go on for a long time, can Republicans accept cuts in defense spending – even with Secretary Robert Gates’ blessing – and measures to expand revenues?  Ronald Reagan, of course, did take the same two difficult steps; but he was more willing to compromise, it seems, than some of his current-day followers.  Across the aisle, will Democrats vote for measures that expand revenues from those they don’t call “rich,” even gradually, along with measures to trim future Medicare and Medicaid costs, even if it requires trimming benefits?

Stating the challenges so concretely exposes the political difficulties.  But we also know what can happen eventually when a wealthy country – one like Japan – loses the political will to raise its’ game.

Who’s Really to Blame for High Unemployment, and What to Do About it

August 10, 2010

An economic slowdown is now here – one we repeatedly cautioned would come – so even the Federal Reserve is downgrading its forecast.   Alas, the United States isn’t alone.  The prospects for Europe look even worse, especially with their largest banks so heavily invested in the bonds of EU member countries still skirting the edge of sovereign debt defaults.  And now China faces the cross pressures of trying to boost their weakening exports while letting some of the air out of their own housing and financial bubbles.  That will spell serious problems for China’s four state megabanks, whose loans keep much of Chinese industry afloat.   We’ll be lucky to come out of this dismal environment with just another year of slow growth and high unemployment.

So, with the midterm elections coming on, most Americans have one question for their elected officials and those hoping to replace them:  What decisive steps are they prepared to take to rescue this economy?   Remarkably, the answer from much of the GOP opposition seems to be, repeal part of the 14th Amendment and stop Muslims from building a mosque in downtown Manhattan.    Of course, there’s also lots of finger-pointing about the economy, including the audacious claim that the fault for the high unemployment lies in the Administration’s economic policies, especially the stimulus.

Since that claim has some popular traction, and even support from a handful of muddled conservative economists, let’s test it with the hard data from the Bureau of Labor Statistics.

From December 2007 to July 2009 – the last year of the Bush second term and the first six months of the Obama presidency, before his policies could affect the economy –  private sector employment crashed from 115,574,000 jobs to 107,778,000 jobs.  Employment continued to fall, however, for the next six months, reaching a low of 107,107,000 jobs in December of 2009.  So, out of 8,467,000 private sector jobs lost in this dismal cycle, 7,796,000 of those jobs or 92 percent were lost on the Republicans’ watch or under the sway of their policies.  Some 671,000 additional jobs were lost as the stimulus and other moves by the administration kicked in, but 630,000 jobs then came back in the following six months.  The tally, to date:  Mr. Obama can be held accountable for the net loss of 41,000 jobs  (671,000 – 630,000), while the Republicans should be held responsible for the net losses of 7,796,000 jobs.

So, when some of those GOP candidates change the subject from unemployment to treacherous immigrants, they actually may know precisely what they’re doing.

Some Democrats may take satisfaction from these data; but that won’t be enough for most voters, not while Democrats still control the White House and Congress.   The opposition may get away with silence about what they would do to bring down unemployment – apart, of course, from the traditional GOP catechism of tax cuts.  But Democrats will have to lay out a more serious program if they hope to convince America to keep them in power.

So, here’s a four-part program for Democrats to take to the voters.  First, create jobs by expanding an Administration initiative already in place:  Deep cuts in the payroll tax for employers who expand their workforce.   Second, shore-up the weak housing market and stabilize falling home prices with a long-overdue, new initiative:  A loan program for homeowners with mortgages in trouble, modeled on federal student loans, to bring down foreclosure rates.  Third, prepare tens of millions of Americans for the jobs the economy will begin to create once it’s back on track:  Provide grants to community colleges to fund free computer training for any American adult who walks in and asks for it.  And fourth, put in place some long-term deficit reduction to head off higher interest rates when the economy does begin to expand again.  Rolling back the Bush tax cuts for higher-income folks is a beginning, but it should be paired up with serious spending restraints.  The best place to start is health care:  Slow down Medicare and Medicaid cost increases with much stricter and more comprehensive versions of the cost-containment measures already enacted in the President’s health care reforms.

That would be a real program that the parties could debate in the fall campaigns – and if the Democrats prevail, they could run on its results in 2012.