Politics and the Economic Crisis
Barack Obama’s historic election as a new, national agent of change will face a daunting test as the economic crisis continues to accelerate, and the political pressures arising from what must now be called “The Great Recession†begin to reshape the response.
The latest evidence is today’s unemployment data: One million jobs lost in two months; the sharpest eight-month rise in the jobless rate since 1945, when tens of millions of soldiers and sailors were demobilized; and losses across every sector and every region. Jobs are in freefall along with the markets, investment, consumer spending, and household wealth. And economists are now genuinely frightened by the course the Great Recession is taking, because there’s been nothing like it in anyone’s experience.
That’s why long-time advocates of fiscal probity now call for stimulus topping $1 trillion, and why every spending and tax idea floating around Congress for the last decade is back on the table again. The political pressures and real concerns are so overwhelming that there’s talk of large tax cuts, despite the consensus among economists that when people and businesses are as economically downcast as they are today, tax relief has little stimulus power. That’s not only politics at work; it also reflects a sense of grave foreboding among many of those same economists.
We do need unprecedented stimulus — but all of the stimulus in the world won’t change the course of this crisis until we also address its underlying forces. The wealth of American households and the portfolios of American financial institutions will continue to tank until the housing market stabilizes — or at least until foreclosure rates return to normal. And the most aggressive, easy policy in our history won’t be enough, and financial institutions won’t begin normal lending again, until they’re more confident that the hundreds of billions of dollars in mortgage-backed securities and other derivatives they still own aren’t headed for the drain as well.
The new administration can take on these challenges directly, as candidate Obama pledged to do with extraordinary foresight. For example, we can impose a 90-day moratorium on foreclosures and use the time to renegotiate the terms of tens of thousands of distressed mortgages held by Fannie Mae and Freddie Mac. One idea promoted by many economists is to convert those mortgages to 30-year fixed at 5.25 percent, which happens to be long-term mean rate for Fannie and Freddie mortgages. It won’t stop foreclosures, but it should bring down foreclosure rates to near-normal levels, which would do more to stabilize the financial system than the bailouts in the Bush administration’s own Wall Street version of tsunami stimulus. And some tough love from the new Treasury Secretary could help restart the lending process: Having done what we can to stabilize the value of their portfolios, we should consider requiring institutions receiving federal aid to use a real share of that assistance to restart their lending.
We need large-scale stimulus, but it will only work if we first address the underlying problems. Otherwise, 18 months from now, we could be $1 trillion poorer and little to show for it.