U.S. Economy Continues to Run Downhill

by John M. Curtis
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Copyright August 26, 2010
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             Great expectations about President Barack Obama’s $787 billion bailout plan haven’t panned out with unemployment continuing to rise and the private sector unable to create jobs.  Without significant job gains in the private sector, there’s little hope for homeowners facing defaults and foreclosures, nearing the levels before Obama implemented his bailout program in early 2009.  Over 2.3 million homes have been repossessed by financial institutions since the start of the Dec. 2007 recession. About 9.9% of homeowners have missed at least one payment, signaling a new trend of mortgage defaults and foreclosures, according to data from the Mortgage Banking Association.  Without some improvement in the job market, defaults and foreclosures are expected to rise, further depressing the economy.  Economic growth requires a stable private sector job market.

              Recent expiration of a special government first-time buyer credit caused nationwide year-over-year real estate sales to drop by 27%, causing the recent sell off in the stock market.  Like a dog chasing its tail, if the stock market drops, employers don’t have the cash needed to expand payrolls and make a dent in the current 9.4% national unemployment rate which, in turn, hurts the real estate market.  High unemployment means less cash to make mortgage payments and, what’s left over, consumer purchases.  Since the nation’s Gross Domestic Product is driven 70% by consumer spending, GDP is expected to remain flat or decline, hurting the nation’s consumer economy.  Without a strong consumer economy, economists expect domestic and foreign manufacturing to drop, causing a global economic downturn, especially in India, China, Europe and South America.

            When the housing market crashed in 2007, the nation’s biggest financial institutions ran out of cash, prompting the Treasury and Federal Reserve Board to bail out cash-strapped banks.  Since the financial meltdown, banks blamed unqualified borrowers and lax lending standards for the real estate crash.  Truth be known, the cash-crunch had more to do with risky investments in derivatives or collateralized debt obligations with depositors’ money, more than mortgage defaults.  Whatever the causes, today’s overly severe lending standards, punishing borrowers not financial institutions, makes it nearly impossible for homebuyers to qualify for mortgages or refinances.  If consumers don’t qualify under today’s standards for commercial and real estate loans, it’s difficult to expand real estate and consumer markets.  Today’s high levels of unemployment make qualifying for loans more difficult.

            Missing mortgage or installment debt payments directly relates to high levels of unemployment.  “Ultimately, the housing story, whether it is delinquencies, home sales or hosing starts, is an employment story,” said Mortgage Bankers Assn. spokesman Jay Brinkmann.  “Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in delinquency numbers,” begging the $64,000 question about private sector job creation.  Most economists don’t see an expansion of private sector jobs unless publicly traded corporations generate enough cash in the stock market.  Today’s unregulated private equity and hedge funds play both sides of the market, typically short-selling during sell-offs, causing markets to slide further in red.  If short-selling persists, publicly traded corporations don’t have the cash to expand payrolls.

            When President Barack Obama signed his financial reform bill into law July 22, it didn’t restrict short-selling by private equity and hedge funds.  Nor did it stop banks from risky derivative investment that caused the financial collapse in 2008.  House Minority Leader John Boehner (R-Ohio), slated to replace House Speaker Nancy Pelosi (D-Calif.) if the GOP takes over the House Nov. 4, called for Barack’s economic team to resign.  While Boehner makes political hay before the midterm elections, there’s plenty of blame to go along.  Obama and Treasury Secretary Tim Geithner should do more to prevent short-selling, especially in financial stocks, to allow stock markets more consistent long-term growth.  With less short-selling, markets would recover more quickly from cyclical profit-taking.  Publicly traded corporations would retain more cash to begin adding jobs and expanding payrolls.

            So far, government efforts to halt mortgage foreclosures haven’t done enough, leaving many too many former homeowners heading for bankruptcy.  Treasury officials must work closely with federal mortgage agencies Fannie Mae and Freddie Mac to retool lending standards to fit today’s deteriorated economy.  Current lending benchmarks prevent average borrowers from qualifying for loans, leaving too many consumers cash-strapped, unable to grow the consumer economy.  Treasury officials should work with Congress to continue Bush’s tax cuts and reinstate the deductibility of interest on all consumer loans, not just home mortgages.  Keeping the stock market rising and growing the consumer economy are the only sure ways of adding private sector jobs.  Reducing unemployment and adding more private sector jobs can only happen by growing the stock market and easing consumer borrowing.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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