Unemployed, But Still A Homeowner

There were two speeches by senior members of the US government about unemployment yesterday. The one that received the most attention was Federal Reserve chief Ben Bernanke’s talk at the Economic Club of New York. Investors and economists had anticipated the event for weeks. They shouldn’t have bothered. Bernanke said that the economy would have a positive limp next year, but that there is no reason to think that the recovery will have enough power to rebuild the jobs market. In his words, “The best thing we can say about the labor market right now is that it may be getting worse more slowly.” That may not last for much longer if improved access to credit, an increase in exports, and a miraculous reversal in consumer spending patterns do not all happen soon. Bernanke has to be a cheerleader, at least to the extent that it will not make him look foolish. His comments about the modesty of the recovery gave the sense that he was writing his own epitaph. The Fed and the government stimulus package have not been able to offset the severity of the downturn.
Barney Frank, the Zelig-like Congressman and House Financial Services Committee chair, spoke far from Washington and New York in tiny Fall River, Massachusetts.  This town was nearly destroyed by the disappearance of the many factories that supported the local economy until the end of the American industrial age.  Congressman Frank suggested that the interest that the government collects from financial firms that it has loaned capital under the Troubled Asset Relief Program be used to keep the unemployed stay in the homes that they own. There may be a great deal of moral hazard that could come from his recommendation, but there is moral hazard throughout the government’s huge labyrinth of bailout programs, so this should not disqualify Frank’s suggestion.

The federal government has gone from investing in the car industry to providing incentives to consumers to buy cars. There are programs already in place to help worthy home-owners who cannot pay their mortgage to get adjustments to bring down their monthly payments. The next logical step in a socialization of sorts of the home owning part of the American dream is to allow people who cannot work to stay home and stay home in their own houses.

A number of experts have pointed out that the present $787 billion stimulus package is not adequate to salvage the economy. The Administration is worried that it cannot sell another set of spending programs to help reverse the unemployment slide. Frank is one of the people trying to come up with a stimulus which does not exactly look like a stimulus.

It is fair to ask why the government will virtually give a man a car and then give him the opportunity to stay in his home rather than just offering him employment.  The government’s cash for clunkers program and the low interest rates that have helped auto companies offer 60-month zero-percent financing have done a remarkable job in reviving a moribund car industry.  Home prices are still falling, but home values have certainly been supported to some extent by government programs to help homeowners keep their property.

Bernanke is hinting and Frank is saying that nothing short of another huge salvo of stimulus money is going to get the American economy all the way back on its feet. Frank and other powerful members of Congress and the Administration are hoping to gradually propose programs to aid consumers and businesses inch-by-inch. The economy’s foundation is too badly damaged for this to work.

If the Fed chair and the head of the House Financial Services Committee are right, they may as well come out and say it. The economy needs another stimulus package that has to allocate at least several hundred billion dollars to job creation. That needs to be added to whatever the costs of healthcare and operating two wars are. That is the tab, and it is dangerous to ignore it. Taxes will have to be higher soon to cover these costs. The burden will only be moderated if GDP begins to grow at the rate that it did in the third quarter of 2003—7.2%. The number was an aberration. There is very little chance that level of expansion will be reached again in the foreseeable future and, if it is, it will not be sustained.

Bernanke and Frank are saying the same thing without saying it. The government is under-investing in fixing the economy.

Douglas A. McIntyre