The Myth of the Recovery
The White House claims the economy is on the mend. That’s a fantasy.
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It could be even worse. When one aspect of GDP grows significantly, it lifts other components that might not otherwise rise; this is known in economics as the “slingshot effect.” Without the temporary, distorting aid of Obama’s programs, the economy might have seen continued negative growth. Even Christina Romer, chairwoman of the White House Council of Economic Advisers, admitted in a statement accompanying the release of the third-quarter numbers that without the extraordinary government intervention, “real GDP would have risen little, if at all.”
This is not real growth. It’s the national equivalent of a credit-card buying spree, with the bills—in the form of debt service and unfunded liabilities—to be paid off later. It is a faux recovery.
The president is betting that private-sector consumption will take over for fiscal stimulus as the main economic driver in 2010 and beyond. This gamble fails to take into account the ways in which the band-aid rescue programs are delaying efforts to address the economy’s deeper problems.
As Goes Housing, So Goes the Economy
Like unemployment and GDP growth, the housing market seemed to show green shoots in early 2010. Housing starts were up 22 percent from January 2009, and the Internal Revenue Service estimated that 1.4 million taxpayers used the First-Time Homebuyer Credit to buy a new house between February and September of 2009.
But there is still significant rot at the roots. Tom Zimmerman, a managing director at the commercial banking giant UBS, predicts troubles ahead. “The housing market has a lot of wood to chop to get through this cycle,” Zimmerman said in October 2009 at an American Enterprise Institute event. “We’re not over by any means in terms of the negative part of the housing market.”
One of the looming negatives is the continued rise of mortgage delinquencies. Going into 2010, one-third of all homeowners owed more on their homes than they were worth. This phenomenon has led to record levels of home abandonment. Coupled with high unemployment and ballooning adjustable rate mortgages, banks are seeing defaults rapidly rising (see Figure 2). If delinquencies continue to rise at their current rate, we could see more than $300 billion in delinquent mortgages by the summer of 2010. The most recent housing data shows 6.25 percent of U.S. mortgages are 60 or more days past due, up 58 percent from a year ago. Why keep paying for your home if you’re going to lose money on the investment?
Some analysts will counter that the trend lines are improving, since the growth in people falling behind on their mortgage was only 7.6 percent from July to September, down from 14 percent in the second quarter. But Wells Fargo’s Silvia disagrees. “Delinquencies and foreclosures traditionally lag the economic cycle,” he says. “We’re likely to see delinquencies continue for the next three to six months. In some areas it might be nine months to a year.”
A possible reason for the delayed reaction is the high concentration of delinquencies in a few areas of the country. According to the Federal Reserve Bank of New York, as of September 2009, 31 percent of homes in foreclosure are located in five states: California, Florida, Nevada, Arizona, and New Jersey. This concentration creates massive headaches for banks trying to recover losses on mortgages gone bad, since what they need most of all is for the foreclosed homes to sell. Not only is selling difficult in areas with high foreclosure rates, but when a market appears prices tend to be disproportionately low—even considering the homebuyer credit—meaning less money recovered by banks.
These numbers, bad as they are, still don’t reflect the full depth of the toxic mortgage problem. In most states, the mortgage holder can legally foreclose on a home once the homeowner is more than 120 days late on payments. But banks and other mortgage owners have refrained from pushing delinquents into foreclosure. While the number of homes delinquent for 90 days or more increased by 2.9 percent in 2009 over the previous year, the number of foreclosures increased only 1.3 percent.
This divergence is a historical anomaly, according to Molly Boesel, senior economist for the property information and analytics firm First American CoreLogic. Delinquency and foreclosure rates traditionally track. “These mortgages should be moving through the process, but they are being held up for various reasons,” Boesel says.
One reason is that many banks and mortgage servicers don’t have the capacity to digest the foreclosures fast enough. But the main reason is that some mortgages from this pool have been modified or refinanced to keep the delinquent homeowner under the same roof. The bulk of mortgage alterations have been funded through the White House’s $75 billion Home Affordable Modification Program (HAMP). By the end of 2009, 130,000 mortgages had been refinanced through HAMP, and more than 700,000 other mortgages were being processed.
The chief problem with this approach is that the average redefault rate for HAMP participants, according to a September report from the Treasury Department’s Office of Thrift Supervision, is a wretched 50 percent. At the behest of the federal government, banks are lowering their lending standards for their least credit-worthy customers, and the results are predictable. Meanwhile the political pressure to prevent foreclosures continues to increase: states, counties, and cities across the country have ordered foreclosure moratoriums, limiting the legal authority for banks to move against nonpaying homeowners. These laws have merely postponed the inevitable, artificially propping up prices and preventing a real market from emerging in both housing and mortgage finance.
The Obama administration and Congress keep putting off the day when the housing market, the root of the economic crisis, gets cleaned out. It will be difficult for a real economic recovery to take off until they stop.
The Banking Mess
Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time.
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The other day, when the unemployment numbers came out, some dope was braying about how the Presidential Suit's economic policies had "slowed the rate of decline" and were therefor a raging success.
Eventually, you just run out of people to lay off, no matter what the yuks in the White House are doing.
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Prosperity is just around the corner! I'm starting to think of him as Herbert Clark Obama.
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A few minutes ago I heard Randi Rhodes on my car radio saying the stimulus is definitely working 'cause there's been an increase in employment for such jobs as teachers, firefighters and such like. She figures that's what it was supposed to do and "the right" (I guess that includes libertarians) should stop complaining about funding going to help this sector create jobs. She fails to mention of course, that in the recent past, the largest source of new jobs in the country have been small businesses, not governments.
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What she doesn't realize is that every single government job is a job that has been transferred from the private sector, not a job that has been added to the private sector.
And that's a best case scenario. Leaving aside the government jobs which have the operational effect of reducing private sector employment, the task of collecting and allocating the funds for the government job means there is some loss along the way.
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There is also the fact that no matter how many new government jobs are created, none of them bring in enough taxes to fund the cost of the salaries for those jobs. That means the money has to come from some non-government jobs, or borrowing, etc. I would think that to be a net drain on the economy.
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You are wrongin your comment,you did not mention that for every dollar the job holder spends it generates 3 dollars om main street.
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You are wrongin your comment,you did not mention that for every dollar the job holder spends it generates 3 dollars om main street.
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"David Parshall, general partner at private equity secondary PEI Funds, warns that badly designed changes could hurt the economy even more than the uncertainty about them."
So what's the track record of getting *well* designed changes in anything like this?
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I heard Randi Rhodes on my car radio saying the stimulus is definitely working
Sounds like a porn star.
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Looks like one, too. From the 70s.
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"Randi Rhodes gets ridden hard and put away wet." ;-)
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She looks like Al Franken in drag and without glasses.
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., let's see what you look like
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is the 2nd time this week that my reply is: I'll have to order a strap-on.
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JUANITA!? Is that you?
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I only like virgins;-)
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Reminds me of Ozzy's guitarist in the 80's
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This could be an 80's guitarist...
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Conventional wisdom presupposes that the economy should recover. Not necessarily so -- there's a piper here to pay.
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Pay me or I'll drop off all these snakes and REALLY fuck up your economy
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Of course the administration's claims are myth because their premise is based on Keynesenian economic theory - which itself is a myth.
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There's nothing wrong with Keynes, it's just politically unfeasable, and leads to long term stagnation. Keynes said to tax the boom & stimulate the bust.
Nobody's ever been willing to tax the boom.
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There's plenty wrong with Keynes.
Government spending is nothing more than forced transfer payments.
It creates no net benefit whatsoever.
The detriment to the transferors completely cancels out the benefit to the transferees.
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There's everything wring with Keynes. Put simply they only look at one side of the ledger. They talk about how spending creates spending, but they ignore the spending that didn't happen because of the transfer that would have created spending.
The idea that government can add value to the process is preposterous on it's face and history is abundantly clear on the issue.
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Agreed, Obama's people are simply not telling the truth to the American people.
Unemployment worsened in January 2010 in 30 states, and hit all time highs in 5 states.
Unemployment Surges, Reaches All-Time High in 5 States in January 2010 http://tiny.cc/iYamB
Further, the February 2010 budget deficit hit an alltime high bc of transfer payments.
February 2010: Largest Monthly Budget Deficit in American History http://bit.ly/aU1hpX
Media won't even rebut the Obama advisor fantasies tho
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The worst part of all of these troubles is that a lot of people know these entitlement and "recovery" policies are rotten and still shrug it off, thinking this is America and somehow we are "too big to fail" ourselves. As if we will just "come up" with 13Trillion dollars and be a solvent country again tomorrow. We've been lulled to sleep for so long, nobody is ready to accept that entitlements have to go away in order to recover. It's almost as if personal responsibility has become so terrifying to people, they'd rather die on the government's leash than stand on their own two feet and make the tough decisions for themselves. So sad for this once proud country...
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Sad part is that it all happened so quickly. Maybe once the eternal-adolescent boomers are gone we can pick up the pieces.
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'As President in 1901, Roosevelt held the ideal that the Government should be the great arbiter of the conflicting economic forces in the Nation, especially between capital and labor.'
Wow it did happen quickly, we had NO chance to see this coming.
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If you keep telling the American people that everything is getting better, then eventually people will believe this and things will really start getting better. The government is trying to brainwash everyone with optimism, and it might work. At least up until when the rioting starts.
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This is the core myth of Disney economics. The jobs lost are real because the spending is real and the bill comes due no matter what you 'believe'.
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But the program has only helped individual buyers and sellers, not the housing market as a whole.
I just came to point out that statement is an outrageous falsehood. The house buyer bribe absolutely did not help buyers, who would have otherwise seen prices go much lower.
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Indeed, just as serious, responsible homebuyers watched prices soar during the bubble thanks to the ease with which irresponsible people could obtain homne loans. It's called "inflation," and that particular mistake has cost us hundreds of billions, if not trillions.
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Which just screwed those responsible people who tried to save up money first and buy something they could actually afford.
When you stop and think about it, it's really nuts to spend 30 years paying for your house. How else can you afford a $400K house? By not buying a $400K house! Prices would never have skyrocketed so high without this artificial bubble, but there is also some 'keeping up with the Joneses' mentality among buyers, too.
I admit I also think it's absurd to spend 5-7 years paying for a car. It's a way to get back and forth to work! These are just two ways that everyone has been living on a bubble for the past twenty years. Throw in over-priced college degrees and hefty credit card balances, and you've pretty much got the list of stuff the government wants to throw money at.
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"If you tell a big enough lie and tell it frequently enough, it will be believed."
Adolf Hitler*disclaimer* I am in no way comparing Obama to Hitler.
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Because Hitler meant it. Obama just wants to be "clear".
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Yep, clear as mud.
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Thanks for bringing it up, just the same
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She fails to mention of course, that in the recent past, the largest source of new jobs in the country have been small businesses, not governments.
Hmm. Has anyone seen any new small governments start up lately?
It's Smart Ass Scrooge for today.
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If the economy is recovering under Obama's polices then I have an oil reserve in backyard.
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Drill baby drill!
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If I'm not mistaken, Reason still hews to an open-borders mentality on immigration. Simply put, you do not solve the problems of a modern, high-tech, First World economy by importing millions of illiterate peasants whose children have 50% dropout rates AND THEN providing these economic underperformers with First World levels of government benefits. Soaring budget deficits are the inevitable result.
And that unemployment number will remain stubbornly high so long as immigration rates remain similar to what they were during the economic boom. The economy is creating jobs, but not any faster than immigrants are arriving.
Brace yourselves: it's a long fall from here, and we've only just begun.
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WJ Alden
+5
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If the government stopped providing benefits, and allowed people to succeed or die based on their work, then immigration could be infinitely sustainable. The type of immigrants coming to a nation that guarantees nothing but the product of your own labor is different then the ones we've been getting lately.
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A libertarian's wet dream. Like the one of me with Laetitia Casta, it will never come true.
The United States is, in a very real sense, property. That which isn't owned separately, like a home or business, is owned jointly by its citizens. That includes schools, roads, sewers, bridges, dams, prisons, and government buildings of all kinds; national parks, national forests, watersheds, waterways, mineral rights, military hardware, ad infinitum - all paid for either in blood or in taxes: my taxes, your taxes, our ancestors' taxes and blood.
The people who come here as immigrants are receiving all of that for free.
Life is not just but about economics, and people are not just units of labor, but that's what purist libertarians would reduce it all to.
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I'm a 50 year old IT worker. I have a job but noticed that the headhunter calls and emails dried up over the last 10 months or so.
In the last few weeks I have received 10 or so emails and actually got a call yesterday from a headhunter.
I'm hoping that the economy is recovering.
I don't think obama's stimulus has anything to do with it, if anything it (and just about everything else he does) hurting the recovery.
After a while the pent up demand will start something. We'd probably already be in recovery if obama and the rest of the nutters had just let things alone for the last 15 months
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The White House has been claiming we're in a recovery since Obama first set foot in the White House 15 MONTHS AGO.
Still no recovery. But don't worry! The rising unemployment numbers mean that recovery is right around the corner! -
Changes in the stock market from a year ago have little to do with improvements in our economy if you measure our economy in terms of full employment.
Barack Obama, our Marxist ideologue in the White House and the Democrats in Congress are destroying our economy. They REFUSE to do what is necessary to create GROWTH in the private sector - cut personal and corporate taxes for a start.
We have incredibly incompetent SOCIALISTS and Progressives (Communists) pushing these outrageous idiotic plans (Government Control of Healthcare and Cap and TAX). The American People will begin cleaning house in November.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history are bound to do the same things over and over.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history are bound to do the same things over and over.
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November is too late
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I run the lender division for the most well known website that matches small businesses seeking funding with the lenders that provide such.
We have had to include in our business model new vertical markets such as debt restructuring co's and credit repair co's due to the fact that our revenue comes from the lender side , not the borrower side.
As such, the lenders are not lending and therefore not buying our leads and we had to fill that void of revenue with new markets.
The credit market for small businesses is FROZEN.
Up to 70% of new jobs come from small businesses. They are NOT getting the capital they need to grow, improve or even stay in business.
This so-called growth is artificial. Period. Until the housing and small business industry improves, we will be stagnant. Period.
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"The problem with Socialism is that sooner or later you
will run out of other peoples money." Margret Thatcher, former PM United Kingdom.It's happening to us now.
This is important. It once again proves that those who don't learn from history and bound to do the same things over and over.
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You end up with rule by whichever sociopath with a gun manages to win.
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