Dr. Peter Morici:Federal Reserve officials are flailing about for new
tools - - for example, more quantitative easing or a better communications
strategy—to jump start the US economy. Sadly, the Fed has few arrows left in its
quill, most are crooked, and Mr. Bernanke appears to
not know where the target is.
The legend on Wall Street is the economy remains
dormant because depressed housing values prevent homeowners from refinancing
their mortgages to free up disposable income and boost consumer spending.
From November 2008 to this past June,
the Fed suppressed mortgage rates and helped put a floor under housing prices by
purchasing mortgage backed securities and long-term Treasuries. More recently,
under Operation Twist, it has sold short-term Treasuries to purchase long-term
Treasuries - - a maneuver aimed at accomplishing similarly low mortgage rates.
Still, sales of existing and new homes
sales remain depressed, and most of the modest increase in residential
construction is in multiunit housing. Young Americans are more frequently
renting rather than taking the plunge into home ownership, and many older
Americans can’t sell their homes for what they paid.
During the boom years, thanks to
“creative mortgages” that encouraged individuals to speculate in real estate,
more homes were built than were needed, and the resulting oversupply will take
years to work off.
The pace of foreclosures and number of
homes banks place on the market will pick up through 2012, because banks are
working through the legal morass created by robo foreclosures. Though banks face
civil penalties or an expensive settlement with the States’ Attorneys General,
most homeowners not able to make payments will have to move out and their homes
will hit the market. This extra supply, realtors’ hype notwithstanding, will
keep housing values depressed for at least the next two years.
A second recession could drive down
values, already off about 31% since their July 2006 peak, another 10 to 20%.
Considering the risks, renting and
postponing homeownership makes sense for young people not blessed with Wall
Street or high tech jobs, and not working in cities like New York and Washington
where the housing recession has passed in upscale neighborhoods.
For most young people, it would only
be rational to invest in a home if they could obtain a mortgage at zero or
negative interest rates.
Currently, the rate on five-year
adjustable rate mortgages is about 3.2%. If the Fed could get the investors who
buy Fannie and Freddie bonds to accept interest rates of minus 3%, then young
folks could be offered mortgages with appropriately negative interest rates. To
accomplish that feat, the Fed would have to buy all those bonds itself -- that’s
right the Fed would finance all federally guaranteed mortgages and write off 3%
a year. I can just hear Ron Paul now.
For these reasons, with or without
cheerleading from the Fed, a housing recovery is not going to lead economy out
of its current funk.
The US economy does suffer from too
little demand, and another popular myth is that this is also caused by
households saving too much. Although the personal savings rate did jump from
2.4% in 2007 to 6.2%, just before the recovery began in mid 2009, it is now down
The net impact on aggregate demand of
the 2.1 percentage point increase in the savings rate is about $275bn - - this
pales by comparison to the $550bn drain on demand imposed by the trade deficit.
Moreover, Americans can only get along
without saving a reasonable amount if they expect their government to borrow,
forever, large amounts from foreign sources to finance their retirements. Greece
has demonstrated how well that model works.
Nope. To jump start the economy, the
trade deficit - - which is almost entirely the deficits with China and on oil -
- must be addressed. That requires confronting China’s undervalued currency and
mercantilism, and finally developing America’s abundant oil and gas resources.
Mr. Bernanke is not permitted to communicate those
facts, because those issues are the purview of the Treasury and Energy
Secretaries. But don’t look for help from those gentlemen, because their boss
taxing millionaires is the answer.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone