An object in motion remains in motion. An object at rest remains at rest. As with objects, so go ideas. People don’t like to change their minds, particularly when their whole way of thinking is challenged. That’s pretty much the case with the epic fail of economics today. In a world on the brink of deflation, many economists want to fight inflation. We’re fighting the demons of the 1970s, when we’re haunted by those of the 1930s.
The standard economic view of 2011 goes something like this: government debt is or will be so large that it will take so much money to finance it that private borrowing will be crowded out. The competing demands of government and private spending will drive up demand for money and lead to inflation.To avoid inflation, we must pay down our national debt and cut back on the spending driving that debt.
The fear of inflation is also supposed to lead to bond vigilantes to selling of bonds and driving up interest rates and the cost of government borrowing. The opposite, however, has happened in spite of Standard & Poor’s downgrading of T-bills and investors have flocked to U.S. securities driving rates down farther. Borrowing hasn’t been this cheap in a long time. Due to the FED’s quantitative easing, the federal government is essentially giving money away. Many have pointed out that a little bit of inflation would not be a bad thing at this point.
Inflation is low. Borrowing is cheap. Banks are accused of hoarding money. And unemployment is high. So why is our economy sputtering? Demand. Americans are too deep in debt having financed their standard of living by borrowing. We are now in the process of deleveraging, paying down our debts. Unemployment is high because demand for their goods and services is low. People are more concerned with paying down their debts than buying new stuff. When consumer demand is low, the federal government should step in and start spending, which is what happened during the Great Depression. Unfortunately, President Obama, the Senate, and the Republican-led Congress have decided to do the opposite and cut federal spending.
There is no simple or painless solution to our economic situation. The only questions are how much pain and who suffers it. Obama’s insistence on deficit reduction is guaranteed to inflict most of pain on the non-rich living in non-affluent communities. Federal cuts mean state cuts which mean cuts to local services. Fiscal year 2012 was not the easiest for cities and towns. Fiscal year 2013 will be worse when the federal government starts cutting money to the states.
There are some things that can be done.
What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.
Aside from good old-fashioned public works and infrastructure projects, Joe Gagnon suggests a third round of quantitative easing, a weakening of the U.S. dollar to boost imports, and the refinancing of federally-backed mortgages:
the Administration should use its control of Fannie Mae and Freddie Mac to force them to invite all homeowners whose mortgages are already guaranteed by Fannie and Freddie, and who are not delinquent in their mortgage payments, to refinance their current mortgage balance at the new low rates regardless of loan-to-value ratio. There should be no requirement to gain the approval of the current mortgage servicers, and the Administration should use moral suasion (and a publicity campaign if necessary) to prevent holders of second liens (home equity lines) from blocking the refinancings.
We’re in a tough spot made much tougher by the abject lunacy of the GOP and the lack of leadership by the Democrats, particularly misleadership in the White House. Yeats’s The Second Coming was never more relevant as “The best lack all conviction, while the worst/
Are full of passionate intensity. As Nobel Prize-winner Joseph Stiglitz opines:
When the recession began there were many wise words about having learnt the lessons of both the Great Depression and Japan’s long malaise. Now we know we didn’t learn a thing. Our stimulus was too weak, too short and not well designed. The banks weren’t forced to return to lending. Our leaders tried papering over the economy’s weaknesses – perhaps out of fear that if we were honest about them, already fragile confidence would erode. But that was a gamble we have now lost. Now the scale of the problem is apparent, a new confidence has emerged: confidence that matters will get worse, whatever action we take. A long malaise now seems like the optimistic scenario.
This is my situation. My husband and I bought a home in 2005. Paid way more than what we should have, but that was the market and we both thought prices were just going to continue to go up and up for several more years. We didn’t have enough cash-on-hand to put down a down-payment. Therefore, we financed using the 80/20 split.
Our main mortgage was 80% of the home price and we took out what is essentially a Home Equity Loan for the other 20%.
Luckily I knew better than to sign up for any of the ARM or interest-only loan types and we do have a fixed rate and term for both loans.
Fast forward to now. We have put $50K into this house since 2005. It is worth about $20K less than what we currently owe. We are stuck.
We can still afford our payments, as we always could, but it would be real nice if we could refinance the two loans together to reduce our monthly expenses.
We are lucky enough to both still be employed, and having extra expendable income each month would allow us to put that money back into the economy.
We didn’t walk away from our mistake (because we really never should have bought in the first place). We are owning it. We are making good on the promise we made to repay the loans. All we’re asking for is some leniency to right what is so badly upside down.
that economists on the Right were making fun of “bubbleheads” (their charming term) who were claiming that a speculative bubble had formed in housing. And guess what, surprise, surprise, a speculative bubble had formed in the housing market.
In 2005, conventional, non-“bubblehead” wisdom was precisely that one should buy property and lots of it. Its price would only rise. Not incurring debt was described as being at once foolhardy and timid. Like rejecting free money. Such harmful advice came from a chorus of experts and authorities, all smug, serious, and certain.
And curiously, none of them have been discredited as a result, either. They’re still giving advice.
is indicated when they emphasize what they are over what they do. Politics becomes a matter of identity, rather than policy.
Economics, like pretty much everything else movement conservativism has touched, has become a matter of confirming biases and arguments asserted less with evidence or reason than with authority.
I had PREVIOUSLY been of the opinion that the what you are vs. what you do thing was nothing but a mistake, an oversight, that once people saw this assumption pulled out into daylight they would reject it.
I am dragging your point down into a pettier area, but I still think the anecdote is kinda illuminating. My partner and I consult to businesses, and because we’ve seen the SAME false assumptions and systemic problems OVER and OVER and OVER again, we’re working on a book (that I now seriously doubt will ever be published, heh) outlining these things. One of the chapters is, “It’s Not What You Are, It’s What You Do”. Sooooo, anyway: to make a long story short, my partner decided to test-drive this formulation when in a feedback session with the top 4 executives of a company. The #3 and #4 guys were delighted — they said they were so happy someone had finally said this. The #1 and #2 guys, however, were so mortally offended by the concept itself — that we should assert it is what you DO, not what you ARE — that they crossed their arms, leaned back, death-glared…and fired us summarily. They’d been happy with us r-i-g-h-t up to the point where we said it’s not what you are, it’s what you do. At that point, we had to be DELETED.
It was a “burn the heretic” reaction. Visceral, immediate. An article of faith, evidently, and not amenable to discussion or argumentation, let alone contradiction. Scary, scary stuff, IMHO. Of course, it only convinces me all the more that I’m right 😉 .
We were on the Cape last week and went over one bridge on the way there and one on the way back. Although I’ve seen it and noticed it before, with political developments this year, I really took note of the construction dates (1933-1935) posted prominently on those bridges. I kinda get the feeling that the public has gotten their money’s worth out of that public spending in the middle of a depression.
The fact that we’re not in the midst of similar public works projects that folks 80 years out will be using is, well, just depressing.
Interest rates are all time lows and helping people stay in their homes is not only compassionate but will help to settle the housing market. Why are we forcing people to repay 6, 7, 8%… mortgages if we can refi down to 4% and let them stay at home. Not only that, but it would “unleash” a significant amount of spending money from homeowners to go buy items which will help the economy. Frannie/Freddie are already backing most of these mortgages so the risk doesn’t go up for banks, in fact it would go down since some % of the homeowners could continue with mortgage payments (vs. defaulting).
They could make it easy too by simply signing a single form and avoid the burdensome paperwork ordeal, house inspections, credit checks, lawyer fees. Simply modify the mortgage rate and payments.
This would also avoid the controversial suggestion by some of “principle reductions” which many believe is a gift to people who made investment mistakes and bought too much house, took equity out of their homes…
PS Applies to everyone, no income cutoff!
posting again.