We Flunked

Dolors & Sense

by Sanford Rose

KISSIMMEE, FL—(Weekly Hubris)—2/21/11—The US and the American people didn’t pass Recession 101.

Sure, the Great Recession is officially over. It has been for a long time. But, in a real sense, it has not left and, like its predecessor of the 1930s, may pay a return visit some time soon.

Housing prices are down over 30 percent from their 2006 peak. They are forecast, conservatively, to fall another 5 percent this year.

If they fall more, expect the proverbial self-feeding downward spiral (price declines leading to more negative equity, leading to more strategic foreclosures, leading to further price declines) to crush the fragile egg shell that is our current “recovery.”

Expect a large rise in an unemployment rate that has appeared to decline only because so many jobless have given up their apparently fruitless search for work.

Expect a continued decline in the labor-force participation rate—the proportion of the working-age population that is working or looking for work. It has dropped from 66.5 percent in 2007 to just over 64 percent currently.

With these developments, expect a decline in our long-term economic-growth potential and, concomitantly, a weakening in our capacity to put a significant dent in the country’s debt burden.

The country needs a refresher course, an after-class tutorial, on how to pass Recession 101.

It needs to learn that reducing deficits depends on revving economic growth, which depends, in part, on expanding the labor force, which depends on avoiding morale-sapping business-cycle fluctuations . . . which depends, quite crucially at this particular time, on reversing the fall in housing prices.

We need to bend all our efforts toward this end.

But how can we? We have never seriously tried to address the collapse in housing. It was always “too big” a problem to confront. The government’s ameliorative efforts—e.g., the HAMP program—have been nothing more than a succession of hastily applied band-aids.

We flunked Recession 101 because we never took the course seriously. We didn’t even bother to attend class.

We should petition for a make-up exam.

At the very least, we should take the following abecedarian steps, proposed by Economist Mark Zandi, to reduce the ongoing surge in foreclosures, which of course add to supply pressures driving down prices and in the process further eroding household net worth.

1. Loan servicers still frustrate homeowners’ efforts to arrange loan modifications by failing to assign a single point of contact for each potential default. Every time the borrower calls the servicer, he/she gets a different clueless employee. Talk about re-inventing the wheel. How hard is it to reform this abuse?

2. Servicers keep borrowers on a “dual track”—modification and foreclosure. Just when the borrower thinks he/she has negotiated a reduced loan payment, up pops a notice to go to court and surrender the keys. Again, is it insuperably difficult to end this practice?

3. No one speaks for the homeowner. No one who won’t charge a bundle is available to advise on the best ways to keep the house. Is it so hard to apply some government money for third-party counseling?

Finally, and most important, 14 million people are in imminent danger of defaulting on their mortgages. A high proportion of these loans are guaranteed by Fannie Mae or Freddie Mac, both of which stand to lose heavily if they have to make good on these guarantees. So why don’t these agencies offer universal refinancing of loans at reduced current rates? The interest reduction will spur consumer demand and save the financial institutions large future default expenses.

Is it so difficult to understand that if one wants to pass the course, one should at least get hold of the textbook?