In my past life, I worked in public policy. This was a pretty much disheartening experience because, whether you’re on the left, right or center, you’ll be disappointed. It’s almost never the case that policymakers (read: politicians) want to make good policy. The policies they do enact are mishmashed compromises sweetened by special interest giveaways. That’s just the logic of politics.
One of the things you frequently hear is that the economy is all psychology. That if people would just be in a better mood, they’d spend more, and then we’d get the Good Ship America righted and back under sail. That’s not so.
More accurately, while there are psychological aspects to economic activity, simply telling people to buck up and get back out there is not a recipe for anything other than talking to yourself in the middle of the night.
You can’t will a country (or a world) out of a recession anymore than government can spend its way out of a recession. There is a psychology to a recession, but there is also a logic to a recession. And that logic is economic.
The problem with the recent bubble is that it was massive and massively inflated. Unlike the tech bubble of 2000-1, this bubble was wide-ranging, affecting not only the real estate market, but the equity markets as well. In addition, because an awful lot of real resources had shifted across the country into building homes and owning homes, this bubble was far wider in scope, affecting many tens of millions more people, than a tech bubble that was regionally isolated and industry specific.
So yes, people are psychologically depressed. But, you know, between 10 and 18 percent of people are unemployed, depending on how the government has cooked the books, so telling them to “buck up” is kind of missing the point. Even if people could “buck up,” we don’t want them to. Recent spending by both individuals and the government has been entirely debt financed. Getting people out there to spend again does them no good.
This bubble has not fully burst because government has not let it fully burst. I would not expect further sharp downturns in prices, but merely a slow 5-10 year mixed recovery. When you re-write the rules in midstream so people who cannot afford their houses continue to hold onto houses, and when you pay people $8,000 to entice them to buy houses they wouldn’t ordinarily buy or buy $8,000 more in house than they would buy or spend $8,000 on furnishing they wouldn’t have otherwise bought… that just papers over the correction.
Crucially: when market conditions are predicated on whether government will extend this or that tax credit, or give this or that subsidy, then market participants become political participants.
There’s some hope: There’s a reason a lot of investors coming to the U.S. are Canadians and other foreign nations. And, god love them, they’ve got wealth to invest. Americans – speaking generally of course – don’t.
But this thing is not over by a long stretch, especially because there is a second wave of foreclosures probably headed our way in 2010.
In addition, I’ve been predicting increased inflation (which means the Fed will tighten the money supply and have to raise interest rates) for a long time. But it’s gotta come, unless the laws of economics have been repealed. And there’s no reason to think they have.
Real Estate enjoyed its run. But now it’s going to get it coming and going. The coming is the collapse of the market. The going are the high interest rates that the Fed will have to impose in order to tighten up the money supply.
That said, people properly positioned in investor-friendly locales (like Phoenix) are going to be ok, and that’s because as interest rates hit the stratosphere, people with cash will have some sweet deals that will do well as Americans, unable to afford 15 percent mortgages, rent in much greater numbers.
