Policy responses during and after the Great Recession like the frantic nature of the Federal Reserve’s monetary expansion measures ( some of them being risky, like purchases of MBSs and very-long-maturity government bonds ), the bailouts that accompanied the Great Recession and the various attempts to provide fiscal stimulus during the Great Recession ( over and above the long-term George W. Bush tax cuts already in place ) can obscure certain crucial aspects of the real side of the economic problems that began around 2008-09 in the United States. This writer has discussed the mismatch between GDP growth and unemployment numbers in the United States elsewhere. In this article, an attempt is made to highlight some aspects of the real estate market in the United States.
The charts below show some important trends like construction activity trends, real estate price trends, house sales and house inventory trends. One thing that leaps up is the decrease in the share of construction in overall economic output from 9% to 5%. Real estate prices are well below their peaks and house sales are below not just the peak values but also pre-recession levels ( the fall in real estate prices was for the most part being driven by demand shifts and not so much by Fed policies. Recent Fed action may be contributing to another bubble, but it does not affect much the basic argument here that demand shifts have played a big role in the recent real estate crisis and continue to do so ). These and other trends in the real estate market are one aspect of the real side of the economic problems facing the United States. They should alert us to the fact that even the most aggressive monetary and fiscal measures and the most accommodative fiscal and monetary regimes ( with all their advantages and disadvantages ) cannot alleviate all the real aspects of economic crises.
Actual and potential measures to target specific sectors and to affect the real side directly, instead of keeping them limited to usual Keynesian measures involving economy-wide or broad-based fiscal and monetary schemes, have their drawbacks. Moreover, there is a lack of very clear understanding among economists about whether or not they can be really useful and whether or not they can have serious negative effects. This writer has discussed some potential drawbacks of Fed attempts to use interventions in the MBS market to try to prop up a faltering housing market or to jumpstart a stagnant housing market in a different article. Attempts to provide large-scale fiscal help to borrowers in the housing market also have their downsides. Aside from the moral hazard question, there is the possibility of cancellation effects from other sectors of the economy and there is also the problem of adding to the already onerous public debt-to-GDP ratio if the targeted fiscal help provided is on a scale that can be expected to have a substantial effect on mortgage payment defaults and foreclosures ( in the current political environment in the US, it is not very easy to finance new, temporary spending with new additional taxes all the time. Instead, additional borrowing is usually needed to finance such measures ). The public policy community, the economics community and the public need to reach a better understanding of the right balance between policies designed to fix the short-term and policies designed to sustain and bolster the long-term. Prvention of gluts and slumps like the one in the real estate market should be a major priority for policy makers and for the democratic system.
by C. Jayant Praharaj ( send comments to firstname.lastname@example.org )