The Challenges that Remain as the Economy Rebuilds

[muck]

From a writer I respect (bolded sentences were done so by yours truly):

 

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There are essentially two major conversations taking place among economists these days. OK, these are economists, there are hundreds of conversations but two are dominant. The first is a debate over whether what has been done to fix the economy thus far has been effective and/or appropriate. This has been raging on for almost the duration of the recession with most economists accepting that the dramatically loose monetary policy and massive intervention by the Federal Reserve and government was necessary to avert an even more dramatic economic collapse. But there has been a persistent minority who has asserted that the efforts have been too distorting and will create even bigger problems later. They are worried about the return of inflation once the system starts to release all the liquidity that has been marshaled. They also worry about the lack of attention to moral hazard and assert that the wrong signals have been sent to institutions whose polices drove the economy into the ground. Mostly they worry that the efforts have been too much and too soon and that the next battle will be over returning to recession once the money runs out.

 

There are some who are calling for more stimulus and then more and then still more. They are in the distinct minority at the moment as the economy starts to correct but should that double dip scenario emerge, there will be more voices added to this chorus. The opponents to this position ask where all this cash is supposed to come from and despair about what this all means to the nation’s mounting deficit. There is some unanimity in terms of what the major problems will be the rest of this year, even if there is not a lot of consensus on what should be done about them.

 

Analysis: The three areas of concern involve familiar territory as the issues from the past have not gone away. In some cases there has been some progress but not enough to warrant too much enthusiasm. In some cases there has yet to be a real reckoning and many expect that 2010 will be the year. The first of these is the housing market, then comes financial regulation and finally that looming deficit. It is the latter issue that has really not made much of an appearance thus far as all efforts have been focused on economic rescue at any cost. This is the year that threats from the deficit will start to dominate thinking.

 

The most immediate threat is likely to come from the still weak housing sector. There has been some real progress in the last year as evidenced by the fact that home prices have started to stabilize in most parts of the country. There have been some signs of life in the real estate market as new and existing home sales have risen a bit. Most of this seems to have been in response to the first time home buyer’s credit, the low price of homes and the low mortgage rates that have been dominant. The problem is that all three of these incentives are likely to go way in the coming months. There have been some dramatic changes in the housing sector and it will take a long time for the economy to adjust. Today, nine of every ten mortgages are underwritten by Fannie Mae, Freddie Mac or Ginnie Mae.

 

This essentially means that the housing market has been taken over by the government as all three of these institutions have lost their independence in the collapse. The Fed has purchased or intends to purchase some $1.25 trillion in mortgage backed securities and that translates into 6.25 million mortgages. These purchases were essentially designed to do one thing – keep home prices from cratering too fast. The Fed and the government as a whole have been dedicated to keeping the market afloat and it has worked. But if the Fed actually starts to reduce the purchase of mortgage backed securities as it has promised to do, the bottom of that market is likely to fall out. At some point the artificial lifeline that has been created for the housing market has to be reduced and nobody has a sense as to whether the market is healthy enough to handle this. Most assume that there will be another big dip in housing, another big surge in foreclosures and another serious downturn in housing. Whether this is enough to push the economy as a whole back into crisis is the point of much debate.

 

The second issue is financial regulation. The opinion of analysts has been mixed on this issue from the start. Some wanted to see a massive overhaul along the lines of the ill-fated Sarbanes Oxley attempt while others pointed out what a disaster that turned out to be. The only issue that most agreed upon was that there needed to be a better way to unwind massive banks and that there needed to be more attention paid to risk management. In the last incarnation, the banks thought they could make all that risk vanish with some derivative magic and those mortgage backed securities. That is not the approach that is favored now. The drive is to ensure that bankers have adequate capital to get them through a crisis and this will mean bigger reserve requirements, plans for their own winddown and “living wills”. The devil is in the details here. Too little control and the banks are destined to be back in the asset bubble business, too much regulation and the world is deprived of capital for years.

 

The third issue is the proverbial elephant in the living room. All the effort to fix the economy has been based on flooding the system with cash. The trillions that have been allocated have been mostly manufactured – selling debt, printing money and making promises that a future generation will be required to keep. The fact is that the economy can hardly deal with an attempt to reduce the deficit at the moment as that would require one of two very unpopular moves – especially during an election year. There will be no major tax hike at this juncture although there may well be some smaller attempts at revenue enhancement. There will be few drastic cuts to the budget either – not when it is government money that is keeping the system afloat at the moment. So the deficit just widens and widens and the day of reckoning is pushed further and further into the future. The solutions to the mounting deficit are not mysterious but the only option that is generally supported would be the one that comes with dramatic economic growth. Unfortunately the point has been reached that the economy would need to grow by almost 7% a quarter for the next ten years in order to make a dent.

Edited January 18, 2010 by muck

[Jimmy Neutron]

Sobering and true on all counts.

[Ursa Majoris]

Too little control and the banks are destined to be back in the asset bubble business, too much regulation and the world is deprived of capital for years.

 

So this means they are run by irresponsible morans then, much as some of us have suggested before? That's ehat the first part of that sentence says. As for the second part, either break them up into proper banks that lend sensibly on the one hand and casinos on the other, or nationalize them.

[The Mucca]

So this means they are run by irresponsible morans then, much as some of us have suggested before? That's ehat the first part of that sentence says. As for the second part, either break them up into proper banks that lend sensibly on the one hand and casinos on the other, or nationalize them.

 

 

So your saying that our elected officials aren't irresponsible morans?

[Ursa Majoris]

So your saying that our elected officials aren't irresponsible morans?

Nope. But the author is clearly saying that left to their own devices, the banks will drop us in the crap again.

[Perchoutofwater]

Nope. But the author is clearly saying that left to their own devices, the banks will drop us in the crap again.

 

Could it be that ineffective regulation, and unfair advantages to Freddie and Fannie led at least in part to the banks getting into the position they were/are in?

[Ursa Majoris]

Could it be that ineffective regulation, and unfair advantages to Freddie and Fannie led at least in part to the banks getting into the position they were/are in?

No. The roots are the exotic derivatives, corrupt ratings agencies, short-term profit / bonuses and the likes of Goldman Sachs betting against their own products and sheer greed and stupidity. The bottom line - again! - is that these people damaged our economy to an almost unprecedented degree and completely destroyed millions of lives.

 

You've claimed many times that the banks were pressured into making loans they shouldn't have but you've yet to prove it or even show any evidence of a bank that made a loan it didn't want to. The fact is that you desperately want to blame the government, officials, regulators, anyone except the vaunted free enterprise system.....but you can't and it bugs the crap out of you that the free market has been shown to be just as incompetent and corrupt as politicians.

[Brentastic]

No. The roots are the exotic derivatives, corrupt ratings agencies, short-term profit / bonuses and the likes of Goldman Sachs betting against their own products and sheer greed and stupidity. The bottom line - again! - is that these people damaged our economy to an almost unprecedented degree and completely destroyed millions of lives.

 

You've claimed many times that the banks were pressured into making loans they shouldn't have but you've yet to prove it or even show any evidence of a bank that made a loan it didn't want to. The fact is that you desperately want to blame the government, officials, regulators, anyone except the vaunted free enterprise system.....but you can't and it bugs the crap out of you that the free market has been shown to be just as incompetent and corrupt as politicians.

Wrong, the root cause of the mortgage crisis was the revisions made to the community reinvestment act under the Clinton administration. Those revisions essentially forced banks to issue subprime loans. Fannie Mae was a hugh part of the problem because they began selling subprime mortgage securities to banks and investors. Fannie Mae being a GSE is as much to blame as investment banks like GS, maybe even more so since they set the precedent by guaranteeing more subprime mortgages and they are a GSE - talk about some crooked ass poopy. Of course it spiraled out of control from there - but the ROOT cause was the government (Jimmy Carter then Clinton).

 

Disclaimer: I have never voted and have never had an allegiance toward any political party.

[Ursa Majoris]

Wrong, the root cause of the mortgage crisis was the revisions made to the community reinvestment act under the Clinton administration. Those revisions essentially forced banks to issue subprime loans.

Show me one case of a bank FORCED to give anyone a mortgage. I'll wait.

[Brentastic]

Show me one case of a bank FORCED to give anyone a mortgage. I'll wait.

Forced in the true sense of the word - NO. But if banks wanted to remain competitive, they were forced to make those loans. It's obvious that the government was giving banks every reason to give these loans and Fannie Mae was one of the biggest culprits because they initiated the precedent. You can't sit there, in hindsight, and pretend these businesses should have acted sensibly when the government was making poopy loads of money by following government mandated provisions and everyone else was following suit. Sure, everyone who participated is to blame - but the ROOT of the problem is the damn government.

[Avernus]

Forced in the true sense of the word - NO. But if banks wanted to remain competitive, they were forced to make those loans. It's obvious that the government was giving banks every reason to give these loans and Fannie Mae was one of the biggest culprits because they initiated the precedent. You can't sit there, in hindsight, and pretend these businesses should have acted sensibly when the government was making poopy loads of money by following government mandated provisions and everyone else was following suit. Sure, everyone who participated is to blame - but the ROOT of the problem is the damn government.

 

people nowadays are bred into living a lifestyle that has them spending 150k per year if they make 100k, 300k if they make 200k etc etc...

 

we even had this commercial playing - "you guys can do this" and "now let me get to work"

 

the work has already been done and also you had appraisers at fault for valuing a house "just in the range" what someone qualifies for even though that value is misleading and often "what someone qualifies for" isn't what they can afford...

 

one thing they need to start teaching in school is how to manage a bank account and 2nd, how to manage money....

 

not everyone has enough sense to spend within their means and we can't be held accountable for people not educating themselves as they should and then having to pay for them like when a credit card company raises your interest rate because more and more people are delinquent...

 

I could go on and on, but I have to hit my emergency room with todays daily News for about 15-20.....

[Jimmy Neutron]

The Fed does have a history of heavy handedness - the money distributed to banks during the "bailouts" is a prime example.

[Ursa Majoris]

Forced in the true sense of the word - NO. But if banks wanted to remain competitive, they were forced to make those loans. It's obvious that the government was giving banks every reason to give these loans and Fannie Mae was one of the biggest culprits because they initiated the precedent. You can't sit there, in hindsight, and pretend these businesses should have acted sensibly when the government was making poopy loads of money by following government mandated provisions and everyone else was following suit. Sure, everyone who participated is to blame - but the ROOT of the problem is the damn government.

I completely disagree. There are many - thousands - of banks that had nothing to do with making loans they shouldn't. There was no FORCE other than sheer greed. To blame the government for this is the sign of a desperate drowning man who flat out doesn't want to believe business is anything other than awesome efficiency. Newsflash - it isn't. And it especially isn't when the next quarter's balance sheet is the only judge of excellence.

 

Your post is not much more than a hymn in praise - or excuse - of sheep. "Everyone else was following suit"? What, are these people lemmings?

[Pope Flick]

I completely disagree. There are many - thousands - of banks that had nothing to do with making loans they shouldn't. There was no FORCE other than sheer greed. To blame the government for this is the sign of a desperate drowning man who flat out doesn't want to believe business is anything other than awesome efficiency. Newsflash - it isn't. And it especially isn't when the next quarter's balance sheet is the only judge of excellence.

 

Your post is not much more than a hymn in praise - or excuse - of sheep. "Everyone else was following suit"? What, are these people lemmings?

 

 

 

Where's that 47 page stickman powerpoint? Everyone here knew it was spot on, and it came out before the bailout. Then after the bailout it's gumments fault?

[Avernus]

I completely disagree. There are many - thousands - of banks that had nothing to do with making loans they shouldn't. There was no FORCE other than sheer greed. To blame the government for this is the sign of a desperate drowning man who flat out doesn't want to believe business is anything other than awesome efficiency. Newsflash - it isn't. And it especially isn't when the next quarter's balance sheet is the only judge of excellence.

 

Your post is not much more than a hymn in praise - or excuse - of sheep. "Everyone else was following suit"? What, are these people lemmings?

 

most people are lemmings...what world are you living in?

[Brentastic]

I completely disagree. There are many - thousands - of banks that had nothing to do with making loans they shouldn't. There was no FORCE other than sheer greed. To blame the government for this is the sign of a desperate drowning man who flat out doesn't want to believe business is anything other than awesome efficiency. Newsflash - it isn't. And it especially isn't when the next quarter's balance sheet is the only judge of excellence.

 

Your post is not much more than a hymn in praise - or excuse - of sheep. "Everyone else was following suit"? What, are these people lemmings?

I admitted that everyone who participated is guilty, there's no denying that - but why are you unable to see that the government played a vital role in this disaster? Is it because you supported the administration who initiated the subprime crisis? If you don't think the government is every bit responsible for this mess, then you need to reconsider your thoughts. I hate corporate corruption (especially a firm like GS) more than anybody, but a firm like GS is working for the government in many circumstances - it's like they do the dirty work and get all the attention while the government looks like the dopey bystander. I'm not buying it. These politicians do everything for personal gain of some sort - why else would someone want to be President or Fed Chairman? The pay certainly doesn't compensate the headache or the work load. I kinda went out there a bit, but everything is deeper that what you see or know.

[Duchess Jack]

So your saying that our elected officials aren't irresponsible morans?

Irresponsible, yes - but morans don't cut themselves multi million dollar bonuses with money they don't have - have the public pay for the bonuses and then pay the bonuses a second time without any concern for reprimand. that is the work of evil - however irresponsible - geniuses.

[westvirginia]

Irresponsible, yes - but morans don't cut themselves multi million dollar bonuses with money they don't have - have the public pay for the bonuses and then pay the bonuses a second time without any concern for reprimand. that is the work of evil - however irresponsible - geniuses.

 

So the congress doesn't consistently vote themselves pay raises while we're running government deficits? You might want to think about that a sec, DJ.

[Yukon Cornelius]

people nowadays are bred into living a lifestyle that has them spending 150k per year if they make 100k, 300k if they make 200k etc etc...

 

we even had this commercial playing - "you guys can do this" and "now let me get to work"

 

the work has already been done and also you had appraisers at fault for valuing a house "just in the range" what someone qualifies for even though that value is misleading and often "what someone qualifies for" isn't what they can afford...

 

one thing they need to start teaching in school is how to manage a bank account and 2nd, how to manage money....

 

not everyone has enough sense to spend within their means and we can't be held accountable for people not educating themselves as they should and then having to pay for them like when a credit card company raises your interest rate because more and more people are delinquent...

 

I could go on and on, but I have to hit my emergency room with todays daily News for about 15-20.....

Started on or around June 1980

[westvirginia]

Started on or around June 1980

 

No, it started after many WWII vets came home and had a bunch of extra disposable income with the wimmens working and GI bills flowing like water.

[Pope Flick]

No, it started after many WWII vets came home and had a bunch of extra disposable income with the wimmens working and GI bills flowing like water.

 

 

Yeah but the GI Bills kept people out of the workforce for a time. Also, that generation grew up during the depression and they never went crazy with credit like their kids did because they remembered growing up hungry.

[Avernus]

the problem started when it became commonplace for women to start working....at that point there is usually someone from outside the family watching the kids and both parties working which was favorable for the government because that's more people they can tax...and then you start having kids growing up "differently" aside from parents who don't know how to raise kids from the get-go anyways...

 

pretty much the wimmens working was the problem all along...keep'em in the kitchen!

 

[Duchess Jack]

So the congress doesn't consistently vote themselves pay raises while we're running government deficits? You might want to think about that a sec, DJ.

They do, I guess. But then - I guess if you've gotten that far in politics you can't be too much of a moran - bereft of morals and able to capitolize off of anything and everything maybe, but not a moran.

[bpwallace49]

So the congress doesn't consistently vote themselves pay raises while we're running government deficits? You might want to think about that a sec, DJ.

 

They do not do it under the guise of the "free market".

 

And politicians are born theives. However a cost of living increase to a congressman who's income is capped is a wee bit different than multi-million dollar bonuses for multiple people that did quite a bit to screw up our eceonomy . .