There are too many moving parts, and too many unknowns to form meaningful, enduring conclusions. The reason? The financial world order we see today may not, in fact, be the financial world order we see tomorrow. The Dow was down about 256 points to 11,165 early Monday afternoon.
But there is one conclusion U.S. investors / citizens can form regarding the U.S. economy, so says an economist: expanding credit and rising home prices, in and of themselves, are not engines of economic growth.
Now, everyone's recognizing 'the obvious'
"We have now entered the age of recognizing the obvious," economist Richard Felson said. "Almost everyone knew that the booming housing market would slow down as soon as all potential buyers had been tapped and as the American economy slowed. But few foresaw the impact the slowdown would have on mortgage bonds, their owners, and the financial system. We now have to rebuild the American credit market, and global credit market, as well, to a degree. It will be a major task."
The primary source of all the above, in Felson's interpretation? Structural problems in the U.S. economy, primarily a lack of jobs, or low job growth, he said.
"For the better part of four years, America went blithely along, confident that the fundamentals of the [U.S.] economy were sound. Yet all the while, job growth and its companion, rising median wages, were inadequate. But they were ignored because corporate earnings were up and home values were rising. But it was a building constructed on quicksand," Felson said. "The boom was not sustainable. The [U.S.] economy did not have growth engines in place for sustainable growth. "
Then was the 2002-2007 growth period a mirage? Not entirely, Felson said. It was, however, what Felson and fellow economist Glen Langan have called 'an asset inflation economy,' in some ways similar to Japan's late 1980s real estate bubble.
"The important point is that the American economy did not have in place the foundation for a sustainable economic expansion, which is a growth in good jobs," Felson said. "Absent job growth it's impossible for an economy to achieve sustainable GDP growth. Soon, the economy's ability to absorb new homes, new consumer goods, etc. reaches its limit, demand slows, with predictable results for foreclosures, bonds, stocks, and the economy at large. We've seen the effects of that slowdown for more than a year now."
Further, Felson said the flawed 'engines' of cheap credit and sky-rocketing home prices are now unwinding, "magnifying the contraction effect."
Felson's solution? You guessed it: in addition to U.S. Fed and Treasury intervention to maintain orderly, functioning, and liquid markets and to prevent contagion, the U.S. economy must identify or create an engine of growth, or a catalyst.
"Whether it's a new technology, or a new sector, or a reinvigorated old one, or an increase in public investment, America must increase job growth to achieve sustainable, healthy GDP growth," Felson said. "There are no two ways around it."
Economic Analysis: Economist Felson also noted the need for substantial financial market regulation, including new institutions that make lenders accountable for mortgages originated, and that regulate derivative use, including transparency. Those two will be large tasks for the new U.S. President and Congress, but no more important than finding ways to create many more good jobs, the foundation of sustainable U.S. GDP growth.
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Reader Comments (Page 1 of 1)
9-15-2008 @ 3:45PM
beanspants said...
Felson's kind of wrong. Most of those of us who knew this was coming simply didn't participate.
We didn't buy homes at bubble prices in bubble locations, didn't upsize autos to keep up with the jones, or didn't tap into home equity if we already owned a home.
However, knowing this info didn't help us that much. The market's been diving down for almost 2 years now, the savings rate's been below 5% for the better part of 6 years and inflation has been high for 3 or 4.
So, basically, unless you already had a large pot of money to bottom feed (which most people don't) then there's not much you can do in times like these. Sure, we could have taken that home equity and shorted stocks i guess, but see above.
We didn't loose much money, but there really was no way for the average person to profit from this fall either.
9-15-2008 @ 7:58PM
william lindblad said...
I intend to be more blunt. Mr Felson is talking like a blithering A--H--E and has no idea what transpired.
Call this moron ed - the real reason behind this mess is making notes with "0" down, no income check. Put on top of this inventive financing that's akin to balloon notes and the bottom line is NO Equity, AKA, nothing to lose if you walk. Half million dollar notes were written to people making fifty thousand a year. People were buying multiple houses with only a signature. IT WAS BEING DONE ON A WHOLESALE BASIS AND THAT IS WHY ALL OF THE PEOPLE THAT WERE RESPONSIBLE ARE NOW IN DEEP S==T, ALONG WITH THOSE THAT WERE NOT.
THANK THE CONGRESSIONAL FINANCE COMMITTEES AS THEY WERE OUR WATCHDOGS. PROBLEM WAS THE BANKERS WERE FEEDING THEM ON THE SLY AND THEY WERE PROTECTING THE WRONG MASTER.
9-15-2008 @ 7:58PM
william lindblad said...
I intend to be more blunt. Mr Felson is talking like a blithering A--H--E and has no idea what transpired.
Call this moron ed - the real reason behind this mess is making notes with "0" down, no income check. Put on top of this inventive financing that's akin to balloon notes and the bottom line is NO Equity, AKA, nothing to lose if you walk. Half million dollar notes were written to people making fifty thousand a year. People were buying multiple houses with only a signature. IT WAS BEING DONE ON A WHOLESALE BASIS AND THAT IS WHY ALL OF THE PEOPLE THAT WERE RESPONSIBLE ARE NOW IN DEEP S==T, ALONG WITH THOSE THAT WERE NOT.
THANK THE CONGRESSIONAL FINANCE COMMITTEES AS THEY WERE OUR WATCHDOGS. PROBLEM WAS THE BANKERS WERE FEEDING THEM ON THE SLY AND THEY WERE PROTECTING THE WRONG MASTER.
9-16-2008 @ 3:09PM
JL Newcomer said...
> I intend to be more blunt. Mr Felson is talking like a blithering A--H--E and has no idea what transpired.<
I'm not too certain he's that far off. While the lender practices brought this to be; it was just sooner and sharper.
The US may have been gaining wealth for a long time, but it's been mostly on paper...and the middle class that the economy is based on has been losing wealth for decades.
You have 'X' empty homes and 'Y' buyers...if your home prices go up without the buyers ability to pay 'Y' decreases and 'X' goes up. The market then corrects itself by lowering prices. The problem is that 'Y' hasn't gone up in a long time, so ways were made to allow 'Y' to spend more with less.
Needless to say, that couldn't go on for ever.
PAX
9-23-2008 @ 10:10PM
annette said...
What if nothing is done, will it help?
I don't think so. As a matter of fact I think FHA - HUD needs to establish a new program immediately. The "Foreclosure Bailout Loan" with normal, guidelines where homeowners with jobs can refinance their current mortgage loans. They need to use part of the Congress bailout money to actually go toward this program. Put their money where their mouth is. This may stop some of the foreclosures, it may stop more unemployment, more banks closing causing more unemployment and foreclosures.
It can be done but TODAY. Not 5 months from now. Someone needs to get off their tail and think this through. Is anyone thinking out there. HELP!! Ideas anyone.