by Frank James
Former Clinton Administration Treasury Secretary Lawrence Summers had a recent column in the Financial Times that has gotten much attention. The New York Times' David Brooks, for instance, cited it in his column today.
Summers's essential point is that the downside risk to the economy is so great, the likelihood of a recession so large, that the Federal Reserve needs to cut short-term interest rates and Congress and President Bush need to engage in some good old-fashioned pump priming by engaging in deficit spending. But even that may not stop the economy from going to hell in a handbasket, he says.
Summers clearly is sounding Keynesian notes here, embracing the notion that the federal government at times when the economic engine shows signs of seizing up, can give the economy a boost through its spending, deficits be damned.
In this regard, Summers would agree with Vice President Cheney who once told a Bush Treasury Secretary, Paul O'Neill, "You know, Paul, Reagan proved that deficits don't matter." Of course, Cheney and Summers were coming to the same conclusion for different macroeconomic reasons, but that's another story.
In any event, Summers' column is well worth reading because it is an alarm from someone with a unique perspective of being one of the premier economists of his generation and a senior Treasury official during the Clinton Administration when there were financial crises in Asia and Mexico.
Summers issues such hair-raising warnings as:
Even if necessary changes in policy are implemented, the odds now favour (British spelling since this appeared in a British newspaper) a US recession that slows growth significantly on a global basis. Without stronger policy responses than have been observed to date, moreover, there is the risk that the adverse impacts will be felt for the rest of this decade and beyond.
Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.
That's a scary forecast; econonomic damage that lasts for years with a crash in housing prices to boot.
Some might be inclined to dismiss Summers as being too alarmist. They probably wouldn't hold jobs in the real estate industry which got some fairy devastating news today.
According to the Associated Press story, housing prices sustained drops in the third quarter that haven't been seen in the two decades since these data have been kept, a period which included at least two recessions.
NEW YORK -- U.S. home prices fell 4.5% in the third quarter from a year earlier, the sharpest drop since Standard & Poor's began its nationwide Case-Shiller housing index in 1987, the research group said Tuesday.
S&P also reported that prices fell 1.7% from the previous quarter, the largest consecutive quarterly decline in the index's history.
The S&P/Case-Shiller quarterly index tracks prices of existing single-family homes across the nation compared with a year earlier.
A separate index that covers 20 U.S. metropolitan areas dropped 4.9% in September from a year earlier. A 10-area index decreased 5.5% from the previous year.
S&P said there is no real positive news in the home price data.
Here's what Summers says should be done:
What concrete steps are necessary? First, maintaining demand must be the over-arching macro-economic priority. That means the Fed has to get ahead of the curve and recognise – as the market already has – that levels of the Fed Funds rate that were neutral when the financial system was working normally are quite contractionary today. As important as long-run deficit reduction is, fiscal policy needs to be on stand-by to provide immediate temporary stimulus through spending or tax benefits for low- and middle-income families if the situation worsens.
Second, policymakers need to articulate a clear strategy addressing the various pressures leading to contractions in credit. Very likely this will involve measures that are non-traditional, given how much of the problem lies outside bank balance sheets. The time for worrying about imprudent lending is past. The priority now has to be maintaining the flow of credit. The current main policy thrust – the so-called “super conduit”, in which banks co-operate to take on the assets of troubled investment vehicles – has never been publicly explained in any detail by the US Treasury. On the information available, the “super conduit” has worrying similarities with Japanese banking practices of the 1990s that aroused criticism from American authorities for their lack of transparency, suppression of genuine market pricing of bad credits, and inhibiting effect on new lending. Perhaps there is a strong case for it, but that case has yet to be made.
Third, there needs to be a comprehensive approach taken to maintaining demand in the housing market to the maximum extent possible. The government operating through the Federal Housing Administration, through Fannie Mae and Freddie Mac, or through some kind of direct lending, needs to assure that there is a continuing flow of reasonably priced loans to credit worthy home purchasers. At the same time there need to be templates established for the restructuring of mortgages to homeowners who cannot afford their resets, so every case does not have to be managed individually.
All of this may not be enough to avert a recession. But it is much more than is under way right now.
Summers analysis of the current economic problems as well as his recommendations for addressing them could open up an interesting new debate for the presidential candidates, both Republicans and Democrats.
First, what do they think of his assessment? Second, if they agree that he is right and that the measures taken so far are too little and too late, what do they think of his advice, especially regarding deficit-spending to get the economy through what, according to Summers is likely to be a long and hard rut?
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Comments
Yet again Frank James recycles the partisan opinions of another washed-up Democrat.
It's easy to find errors in the article, but I'll limit myself to just one howler: the idea that since "nationwide house prices could fall ... there is no real positive news in the home price data."
Frank, Larry: if you're a young person trying to purchase a home, that's really positive news.
Rising home prices help sellers and hurt buyers. Falling home prices help buyers and hurt sellers. Each is "positive" news to the one and "negative" news to the other.
Posted by: Bruce | November 27, 2007 1:07 PM
With the economic calamity currently unfolding, mostly Bush's fault, it will be sad to watch him talk about this as if nothing was wrong, no matter how bad it will get.
Posted by: RomanB | November 27, 2007 1:13 PM
This needs to be broken down for those of us out in the hinterland who measure the economy by how much a loaf of bread costs, and how utility costs are creeping up.
Posted by: GW | November 27, 2007 1:14 PM
Yet again Frank James recycles the partisan opinions of another washed-up Democrat.
It's easy to find errors in the article, but I'll limit myself to just one howler: the idea that since "nationwide house prices could fall ... there is no real positive news in the home price data."
Frank, Larry: if you're a young person trying to purchase a home, that's really positive news.
Rising home prices help sellers and hurt buyers. Falling home prices help buyers and hurt sellers. Each is "positive" news to the one and "negative" news to the other.
Posted by: Bruce | November 27, 2007 1:07 PM
Bruce, you idiot... freefalling prices help noone. It only helps buyers if they get in on the bottom... but today's buyer is not helped if the value of his house a year from now is 75% of what he paid for it today. Therefore, if you're predicting home prices to fall for the next two years, then today's buyer AND seller are both screwed.
Thereby your "howler" is a true statement that you intentionally misread in your feverish, neverending attempt to attack the messenger... instead of actually, you know, addressing the subject matter? (I know, crazy concept, right?)
The only true howler in these threads are your ridiculous straw-man posts that rarely, if ever, address the issue at hand. They always elicit a hefty, barrelchested laugh. It's good comic relief before the adults get back to discussion.
Posted by: crafty b | November 27, 2007 1:46 PM
Bruce,
Maybe you could show what year it was when housing prices fell? Did it correspond with good overall health of the economy?
Posted by: pat mcgillicutty | November 27, 2007 1:52 PM
Forget the scare numbers on housing price drops. The housing market, like the stock market, goes up and down. Many housing speculators lost. After multi-year, high increases fools thought it was a sure thing. Surprise!
Bad loans, prompted by the government, won't be repaid. Jesse Jackson is today protesting that loans given to risky buyers shouldn't have been made. Last year it was the opposite.
Why must demand be maintained? The City of Chicago weathered an office glut 2 decades ago providing bargain rents for new start-ups.
This is another Clintonoid trying to convince everyone how bad things are now (in spite of other evidence) to show the need for their control of the economy.
Posted by: whatnow | November 27, 2007 2:08 PM
Regardless of what Larry Summers, Bobo Brooks or RNC Bruce have to say, home prices will continue to drop for a very simple reason: Wage growth has failed to keep up with home prices. Until wages are in line with home prices, the correction will continue.
Crafty makes a good point because no one wants to try to "catch a falling knife". Buyers will sit it out until they are certain prices have stabilized. Sellers will continue to chase the market down. Once home prices are in line with real wages, then and only then will we see the bottom. Meanwhile, enjoy the financial big boys having to eat dirt until this resolves. I know I will.
Posted by: weinerdog43 | November 27, 2007 2:19 PM
Bruce,
That's some good spinning. Let me try: 3876 Americans killed in Iraq may be good news for al-Qaeda and Iraqi terrorists, but to the families who lost a loved one....oh wait. Maybe you could spin this into good news. Please help me.
Posted by: rookieRepublican | November 27, 2007 2:25 PM
The only true howler in these threads are your ridiculous straw-man posts that rarely, if ever, address the issue at hand. They always elicit a hefty, barrelchested laugh. It's good comic relief before the adults get back to discussion.
Posted by: crafty b | November 27, 2007 1:46 PM
crafty,
Brucie is just an RNC propaganda tool, he's been doing this for a long time. This is Bruce from 'Fear and Loathing'; Literally the first entry in The Swamp by Frank James.
"In the interests of full disclosure, will the Tribune contributors to "the Swamp" (Frank James, Mark Silva et al.) reveal their political biases by disclosing who they voted for in 2000 and 2004 (and other years) for president? How can the readers fully or accurately assess their postings, the "take" they have on current events, or even what they consider "newsworthy", without this information?
Posted by: Bruce | January 5, 2006 9:55 AM"
Posted by: Commander W. in Codpiece | November 27, 2007 2:25 PM
Regardless of what Bruce and the GOP say we are headed for a crisis. Not only that, it is a crisis of the Bush administrations making.
Posted by: nisleib | November 27, 2007 3:02 PM
Bruce-Logic:
The Stock market dropping is good.
Getting a paycut is good.
Losing a war is good.
Being robbed is good.
\It's the Bizzaro world!
Posted by: AJF | November 27, 2007 3:15 PM
If, after years of artificially low interest rates and devalued currency, we are still at such a "serious" risk of economic downturn - I think we're in trouble...ESPECIALLY if the proposed solution is increasing the Keynesian policies of Bush that caused such inflation to begin with.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
~~Ludwig von Mises
Posted by: underground | November 27, 2007 3:49 PM
Larry Summers is like all the Clinoistas he doesn't know anymore than anyone else.
Free markets determine supply and demand not government bureaucrats especially of the Keynesian vein.
Keeping taxes low and short term the Federal Reserve needs to cut interest rates instead of worrying so much about inflation.
Carter ruined housing in the 70's when Paul Volcker raised interest rates as high as 22.5 percent. Shows you why electing incompetent peanut farmers from Georgia will do to ruin a nation. Jerry White, Springfield, IL
Posted by: Jerry White | November 27, 2007 3:52 PM
We have friends trying to sell their home in the Gold Coast, Old Town area and have had to drop their prices twice in the last two months, likewise their neighbors looking to move ... not an up and coming NW Side nor South Side but Gold Coast, Old Town border area!! Buyers with good credit are now starting to have problems finding a mortgage and with house prices looking to drop further, this is more like buying a car (devalues) than a house when you look at the situation financially. It's not fun to find yourself upside-down on a mortgage.
Posted by: Gary Dee | November 27, 2007 4:07 PM
Once again rnc bruce tries to sell us his useless snake-oil while others tell it like it is:
http://www.nytimes.com/2007/11/26/opinion/26krugman.html?_r=1&n=Top/Opinion/Editorials%20and%20Op-Ed/Op-Ed/Columnists&oref=slogin
And from John M Kelly:
Most money being made today is from the financial transactions—the interests, the fees, and the creation of new kinds of exotic financial products that parse debt and resell it. Dealing in debt is quite lucrative. None of this actually produces wealth; it merely redistributes it more and more to the people at the top who have the money to lend.
The seventies stagflation were produced when the government stopped printing money to pay for the Viet Nam War and will happen again when this war ends. But it may happen sooner because as the economy becomes less secure and deflation becomes an eminent threat, China, Japan and Middle Eastern oil countries that are buying that debt may decide the Euro may be a better bet. When that happens as the old saying goes, “It will be Katie bar the door” to stop the rush to the exits.
At some point this must come unraveled in a rather nasty way. Whether it happens tomorrow or not is not the question, the answer is, it will happen and when it does it will be catastrophic for individuals, businesses, and government entities at all levels. What will happen to the big boys who created all of this? Well, most of them learned from the experience of Michael Milken the “Junk Bond King” who developed junk bonds, or “high yield debt”, to (guess what) finance leveraged buyouts. Indicted on 98 counts of racketeering and securities fraud, he pled guilty to six securities charges. He served twenty-two months. According to Forbes, he paid a total of $900 million in settlements and fines and still had a net worth of over $1 billion upon his release. His current net worth is estimated at $2.1 billion.
The private equity and hedge funds are not regulated by the SEC and most are registered offshore for tax and liability purposes. When it all falls apart most will be able to retire to their homes in the Mediterranean and live off their money in the Caymans, while the rest of us pick up the pieces.
Posted by: dt | November 27, 2007 4:54 PM
Yep Bruce, its a buyers market. Duh. All we need are the buyers now. The next 6 months will tell us if they are there. As someone who, along with his fiance will have two homes on the market, I am hoping they are out there somewhere.
Posted by: kb | November 27, 2007 5:46 PM
kb, good luck unloading one of your homes. (seriously) There are some areas where the houses are still selling. Here in my neighborhood in Naperville, I've seen 3 sold signs within walking distance. Price it right and I think you'll be OK.
Posted by: weinerdog43 | November 27, 2007 5:59 PM
Another howler: that Frank James wants to stir "needed debate' by posting this article.
Actual debate is the LAST thing Frank James desires.
Instead, Frank James wants a "managed" debate over the issue he poses above: should we move to the left, or not?
A true debate would include in the question that option. An article intended to spark TRUE debate would include a rebuttal to Mr. Summers.
But leftists never want an actual debate. They prefer the CNN-Dem kind of debate, with planted questions and planted questioners.
Posted by: bruce | November 27, 2007 6:18 PM
For those of short memory, take a look at the USA Today of May 11, 2005. Under the headline "Bubble or not, high home prices can hurt", the article explains how soaring housing prices are causing problems.
http://www.usatoday.com/money/perfi/housing/2005-05-10-housing-cover_x.htm
Among the problems cited were: "High prices are keeping buyers out of the market, making it harder for firms to attract workers in pricey markets and breeding high consumer debt and speculative buying."
Which is exactly what I pointed out in my posting.
And what did the article predict for the future?
"Many economists warn a major swath of the market is at risk of a price correction."
Which is exactly what is occurring.
Housing prices go up and down--a fact I (mistakenly) assumed everybody knew. A graph of housing prices since 1890, adjusted for inflation, is at http://www.talkstates.com/forum/general-u-s/588-history-u-s-housing-prices-1890-2006-a.html
You can see how housing prices go up and down on a regular basis. They went DOWN, by the way, during Clinton's first term.
These are the "inconvenient truths". Econ 101, as it were.
Posted by: Bruce | November 27, 2007 6:39 PM
I think we need Bush tax cuts for 2008. Spur the economy like in 2001 and 2003.
So what are all the dems that are calling for tax increases going to do as they are saying the economy is heading for a recession. Are they going to continue the drumbeat for higher taxes that will just retard economic growth?
Posted by: Terry | November 27, 2007 7:39 PM
Dropping prices are good because they help 1st time buyers? Really? What percentage of homes are sold to 1st time buyers? Who is most likely to be declined for a mortgage other then 1st time buyers?
This miniscule amount of buyers, which has shrunk in greater numbers then any other catagory of buyers, is not as helpful & is nowhere near the positive development some believe.
& one former president who is a peanut farmer was also a nuclear submarine commander. Not exactly a position daddy could buy for their son, like, say, get them into the National Guard.
Posted by: RomanB | November 28, 2007 12:03 AM