I seldom offer economic or political predictions, but it isn’t too much of a risk to suggest that the next president will come to office in the midst of a far deeper recession than we are now experiencing. The depth and intensity of this recession will depend in part on the actions or lack thereof taken by a lame duck Congress and a lame duck president. If Congress and the President cannot agree on a large and well targeted economic reconstruction program, this economy is in for a long l-shaped recession, likely analogous to the decade of economic stagnation suffered by the Japanese economy after the collapse of its real estate and equity bubble.
Contrary to some of the business press, the current fall off in consumer spending, business investment, and residential construction is not primarily the consequence of a weak or poorly regulated banking and finance sector. That sector has surely exacerbated the problem through its reckless securitization of mortgages and other exotic instruments. Nonetheless, it was the collapse of an asset bubble in housing that may eventually destroy as much as $8 trillion in homeowner wealth that has triggered the current recession.
We are still in the early stages of experiencing the consequences of the collapse of that bubble. Home prices in many markets still must fall a long way before reverting to historic trend lines. The effects of the bubble collapse go well beyond the so-called subprime borrowers. Home buyers in all income and wealth categories were encouraged both by business leaders, bankers, and Federal Reserve prognostications and interest rates to borrow up to and beyond any reasonable limit. No one need worry, because if worse came to worst, the homeowner could sell for more than the purchase price or borrow more on the equity value of the house. In the next few months, teaser rates on many home mortgages well above the subprime category will be reset and more houses will be dumped into an already glutted housing market.
As the equity in homes all across regions and socio-economic categories diminishes, homeowners feel less secure and adjust their consumption accordingly. Nouriel Roubini, professor of economics at NYU’s Stern School of Business, estimates that the wealth-related decline in consumer and business spending will be in the neighborhood of 300 to 400 billion dollars. Already states and local governments, in response to diminished revenues, have cut positions and programs and the resulting decline in jobs will further depress demand. Neither European nor Asian economies are likely to bail us out with more imports. As Roubini points out, all the advanced economies, representing 60% of world GDP, were in recession or slower growth even before the extent of our financial difficulties had become obvious. Many European banks were even more highly leveraged and just as poorly regulated as their US counterparts.
Even if the Bush administration’s badly managed bailout of the US financial system were to restore the health of commercial and investment banks, most will still be reluctant to lend money into a slumping economy. Most businesses will be hesitant to borrow.
The longer we wait, the more unemployment grows and the weaker the base upon which future economic growth depends. Neither this Congress nor this president has a legacy of which they can be proud. But a genuine and constructive bipartisanship in the lame duck session could both restore some faith in our politics and improve our economic fortunes. Congress must enact an economic reconstruction program far superior to its embarrassing effort last spring. Tax cuts for the wealthy and even the middle class won’t cut it. In the current climate of fear and retrenchment, those funds will not be spent. Government must take up the slack, and surprisingly even some of the more conservative voices on CNBC and some centrist Democrats like Robert Rubin recognize that in an economy spiraling downward, deficits will not “crowd out” private investment or occasion inflation. Speed is of the essence. Money needs to go to programs or people who will spend it. An effective and just package would expand unemployment benefits, increase funding for food stamps, provide block grants to state and local governments for programs long planned but now in forced retrenchment, and fund infrastructure spending, especially for projects already planned.
The final test of this Congress and the first test for President-elect Obama is now. If for whatever reason Obama is reluctant to assume the leadership in pressing for such a package, Democrats in Congress should take the initiative. If President Bush vetoes a progressive stimulus or Republican senators filibuster it, their actions will make it clear to the electorate where responsibility for a deepening recession lies. Both Congress and the president-elect have immense political stakes in initiating constructive action now.
John Buell lives in Southwest Harbor, Maine, and writes regularly on labor and environmental issues. Email jbuell@prexar.com.
From The Progressive Populist, December 1, 2008
Subscribe to The Progressive Populist