Republicans Mortgaged the Future

After the American Century

The US housing market continues to falter. When houses are worth less than people paid for them, some owners will conclude that declaring bankruptcy is their best, perhaps their only option. In June, 2008, one out of every 501 homes in the US was foreclosed - a total of 252,000 properties. That was 50% more than June the previous year. If that monthly rate continues for a year, then 3 million homes will have been given up for auction or sale at reduced rates by the repossessing banks. That represents housing for about 10 million people.

December 12 last year I wrote in this space that "Bush Administration policies encouraged housing prices to soar while undermining the strength of the economy as a whole. A correction is unavoidable. One hopes it will not be too severe." In the ensuring 7 months the correction has continued, and now seems to be nearing a crisis. The news today is that many analysts are worried about the financial health of Fannie Mae and Freddie Mac - names which make them sound like two people. But these are billion dollar institutions that back up the mortgage lending of banks. Both are traded on the stock exchange, and in good times they are stable, safe investments. But their stocks have been falling steady for months, and yesterday each dropped by more than 15%. That's one sixth of their value lost in a single day. Government spokesmen are all "walking on eggs" - treading with the utmost caution, trying to put the best face on how the continuing foreclosures are affecting these institutional cornerstones of the economy. On the bright side, the rate of foreclosure in June was lower than the month before, so the worst may have passed. On the dark side, interest rates already are quite low, so there is not much the Federal Reserve can do to stimulate the economy or make home-buying more attractive.

Everyone assumes that the Federal Government will pour additional money into these institutions if they need it. But the US government is already running a large deficit, borrowing money from abroad to pay some of its bills. In 2007 the deficit grew by $162 billion, an impressive figure, but nothing compared to 2008, which may be the worst year of overspending in US history at more than $410 billion. The worst so far was 2004, when Bush spend $413 billion he did not have. Much of that was for the wonderful war in Iraq. It is easy to forget now that this was the war which we would win quickly and that would pay for itself, because all that oil would be sold to pay for redevelopment. Well, this was not what happened, but the oil has certainly increased in value. All oil producers are benefiting, but not US home and car owners.

Probably the economic storm will pass, housing prices will stabilize and prices will climb again. In that case, the dip in the market has been good for people who wanted to get into the market like my niece who just bought her first house. But if the market continues to fall, at some point the dead weight of unpaid mortgages will put tremendous strain on the economy as a whole. How does anyone sell a house, in order to relocate for a new job, for example, if there are several million foreclosed properties on the market? What happens to the older couple who expected to sell their large house to downsize into an apartment, now that the kids have grown up and moved away?

The crisis is hardly over, in other words. The worse it gets, the more Republicans running for re-election will take the blame in November. Because they mortgaged the future.

You have been reading After the American Century

Costly Oil: The Return of Stagflation?

After the American Century

Today the European Bank is widely expected to raise interest rates. The mantra of economists remains that inflation must be controlled through higher rates. In "normal times" this seems to be the case. Raising interest rates makes money a bit more expensive, curbing consumer spending, slowly down the economy. The usual metaphor is that the economy is "overheated," like an engine pushed too hard. But "normal times" are those when the cost of raw materials remain reasonably stable, especially the cost of oil, coal, and other fuels.

Back in the 1970s the American Federal Reserve kept raising interest rates, because of inflation. But the remedy did not cure, because the cause of inflation was higher energy prices. What resulted was absurd. The interest rates went up to almost 20% to combat inflation while the economy stagnated. The pundits called this "stagflation" and we may be about to see the same thing happen again.

As of this morning, the price of oil has reached $145 a barrel. In the United States and in Europe consumers have been protesting, to no effect, because they are complaining to their national governments. But in a globalized economy, no prime minister can control the price, except by lowering gasoline taxes. This would stimulate consumption, however, and be bad for the balance of trade in an oil-importing country. Nor will raising interest rates lower the cost of oil, except marginally, by reducing economic activity.

Wise leaders - unlike George W. Bush - might respond to this new situation in the following way.

(1) Tax vehicles not by weight but according to how much oil they use, i.e. very low taxes for the most efficient vehicles and punitive taxes for those that are not.

(2) Halt road-building and invest the same money in public transit.

(3) Permit some rezoning of cities, so that population density can be increased. Deconcentration of American cities, which began in the 1920s and 1930s, has created a sprawling energy-inefficient economy, making it harder for mass transit. Rezoning might be modeled on the fine exampleof the Dutch.

(4) Give tax-incentives to energy conservation of all types, including building insulation, heat-pumps, and better architectural design.

(5) Restructure utility prices so that there is a financial reward to the companies that reduce consumer demand.

(6) Invest in alternative energy R & D and in its installation.

These are not new ideas. They are the ideas which most governments have ignored, in practice, for the last two decades.

The current high prices signal the need for a new energy regime. This is not just another economic storm that can be survived by raising interest rates.

If you want to know a bit more about the history of US energy consumption, see
David E. Nye, Consuming Power: A Social History of American Energies (MIT Press).