About two years ago, Dr. Nouriel Roubini, a then well-respected albeit obscure economist at New York University (Go Violets!), predicted a financial markets meltdown of epic proportion. In a nutshell, he predicted a historic housing bust, crippling oil prices, and a deep recession which if badly managed, could be long term like the recession Japan faced in the 90’s (10 years of economic stagnation).
What did he get for it? The label, Dr. Doom. After all, when he made these predictions in 2006 (though the housing market was softening a bit), the economy was still growing, oil prices were relatively stagnant, and unemployment was low.
Well, if he is a betting man, he’s rich. And because of his now prophetic-like predictions, he is also famous. (Let me just say, I was right with him. But I was broke in grad school then, so no betting for me!) I think he continues to be right with his thoughts about how to kick start the US economy, and it does not involve a $700 billion check with no oversight.
His answer starts at the consumer level. He calls for the creation of the Home Owners Mortgage Enterprise (HOME), which is modeled on one of FDR’s New Deal programs– Home Owners Loan Corporation (HOLC) . The HOLC bought mortgages from banks at a discount price, then reduced the face value of the mortgages, and refinanced the mortgages for borrowers at a lower mortgage rate. The program staved off thousands of foreclosures and the further erosion of home values.
Why do I think he is right? While any action will need to help the financial industry out from under its bad debt, any plan should put the US consumer/taxpayer first. Consumer spending is the backbone of the US economic model. Falling home prices, stagnating wages, and rising cost of consumer goods is forcing an already debt ridden consumer base further down the slippery slope. As home prices fall, and consumers can no longer turn to their homes as nest eggs or lose them all together, we will not only have an unmanageble surplus of homes, but a continued erosion on consumer confidence and spending. If consumer spending and US productivity is paramount to economic growth, no successful economic plan should exclude relief at the base level.
Some argue that the current economic crisis is due to a bunch of home purchasers throwing caution to the wind and buying homes they cannot afford and we should therefore let them fail. I think they are wrong. Yes, lack of financial savvy on the part of consumers is part of the issue, but the problem starts and ends in the financial services sector. It boils down to failure to underwrite prudently and appraise properly. The National Association of Mortgage Brokers, the Center for Responsible Lending, and the Federal Reserve have all come to the conclusion that the over valuation of real estate through the appraisal process, which was encouraged by the banking industry, is one of the largest culprits. (In a nutshell, bigger value + bigger mortgage + bigger fee = bigger profit, until reality set in.)
Like Dr. Roubini, I believe the proposed $700 billion plan is part and parcel of the clearly failing "Trickle Down", "Voo Doo" economics theory and is simply a short-term solution that only benefits those in the financial sector and does not take into account larger systemic issues or the people who will be most affected by the plan.
Not once. Not twice. But three times, we have seen that deregulation and trickle down theories just add up to over-regulation and tax payer bailouts on the other end. ( Unless the trickle down only works when something is rolling down hill.) The $700 billion plan is no different. Before the continued erosion of home values and the ability to pay turns the current crisis into a long term nightmare, lets start at the base where the impact can have some of the greatest long-term impact on the economic future of the US–the US consumer.
