Fine in 2009 (Not So Great in 2008)

Excerpt from John Makin's latest commentary:

The underlying cause of the problems in the financial sector is a persistent fall in house prices....The U.S. housing stock is worth about $23 trillion, so a 15 percent drop in house prices represents a wealth erasure of $3.45 trillion over a period of about two years. That figure represents about a quarter of annual GDP or about 12.5 percent of GDP per year for two years...

The efforts by the Treasury and the Fed thus far to contain the problems tied to the collapse of the U.S. housing bubble have failed simply because they have been inadequate. That said, they have probably slowed the onset of the problems and, to some extent, reduced the ultimate size of losses that are likely to be experienced...

Unfortunately, the record shows that while election years are high on rhetoric in the face of difficult problems, such as the collapse of the U.S. housing bubble, they are low on solutions. Rather, it probably makes more sense to look for a large housing bailout sometime in 2009 that will entail the creation of an agency that looks like the Resolution Finance Corporation, which helped to end the Savings and Loan Crisis over two decades ago...

A simple plan to mitigate subprime losses would allow distressed subprime borrowers to become renters of properties they occupy. The lender could negotiate a rent that might approximate current mortgage payments and take title to the property...

The Fed should cut the fed funds rate until the Treasury-security yield curve steepens further, say to a 200-basis-point spread between short-term rates and ten-year notes. That will help bank income statements and stimulate some additional spending...

Another big policy push should be directed toward establishing transparency in the market for mortgages and derivative securities. This will require a move toward auctions of such assets where accurate market pricing of complex securities can be established...

If all of these measures are undertaken, things will be fine in 2009. This year, however, may not be so great.

Comments

[mlimberg:]

Really? Fine in 2009? And I'll bet you think Bank of America buying Countrywide is a good idea too?

With Government intervention, this downward spiral should be resolved in 12 years. It's an election year, and yes our mental midgets wanting to be a President will promise everything. Keep in mind that one person caqn not make a difference without the support of the House of Reps and Senate. It's a system of Checks and Balances, and Our system of Government does not allow for a Dictatorship, where a single person can "fix" anything.

2008 Jan 10 07:27 PM

[Yokohama Kid:]

Your comments on US economy makes sense as long as we see some future in Brics economic development. Not only US economy but also other advanced nations depend upon their lower-cost manufacturing capacity and increased purchasing power. A question is how much US can alleviate housing slump if and when Brics begin their economic downturn for some reasons unknown to us yet. At any rate, US requires strong leadership that will help us recover confidence and will make us say "US is the only nation that will change the world for better."

2008 Feb 01 12:37 PM