Why is the Economy Growing So Slowly? Q&A with AEI's James Pethokoukis

"Considering that we had this big Tea Party movement in 2010, there has been very little talk about actually cutting spending," says American Enterprise Institute's James Pethokoukis, "except that Mitt Romney doesn't want a lunar colony."

Pethokoukis is a former Reuters columnist and widely read blogger, who covers economics, politics, and fiscal policy. He sat down with Reason.tv's Nick Gillespie to talk about tax reform, cutting spending, and why slow growth is the biggest problem facing the U.S. economy.

Approximately 6 minutes.

Shot by Joshua Swain and Meredith Bragg; edited by Jim Epstein. 

Go to Reason.tv for downloadable versions and subscribe to Reason.tv's YouTube Channel to receive automatic notifications when new material goes live.

Comments

[Rumy Mayor]

Sounds like a good idea boo
http://www.Gone-Anon.tk

[Olduvai Theory]

Peak Power
Peak Economy
Peak Water
Peak City-Statism (civilization)

You are now cleared for the ride down.

The Olduvai Theory:
Sliding Towards a Post-Industrial Stone Age
Richard C. Duncan, Ph.D.
http://www.dieoff.org/page125.htm

[Fat Indian]

As we descend and civilization fractures we plan on killing the fattest first.....they run the slowest and we expend the least energy retrieving their flabby Twinkie bloated carcasses.

[wjv]

Richard Duncan is correct. Pay attention to this! This is not covered honestly or enough, even by reason.com, (which has much higher standards than MSM).

Seriously, economists are like the astrologers of the Dark Ages whispering into the ears of Kings about the future. They have no idea, because they don't know what the economy is truly based on.

The economy is truly dependent on energy. Right now nearly all transportation relies on a particular form of energy: oil. Oil production is beginning to fall, while demand rises... obviously this will create a grinding slowdown as prices remain high. Oil production is falling due to geological reasons outside of the control of human beings, it cannot be reversed by any policies. It's just physics, once half (on average) of the oil in a reservoir is pumped out it begins taking more energy to pump the oil than there is energy IN the oil.

[wjv]

Oil is uniquely capable (as an energy dense liquid) of powering vehicles.. other energy sources can't compete for this function. Once powering vehicles becomes too expensive, imagine how much of our economy grinds to a halt. Trucking over, airlines, over, plastics get more expensive. Economists will tell you we can just substitute other energy for oil, but nothing is as energy dense and already in liquid form. Nothing else will do what oil has done for us as cheaply as oil has done it.

The economy is growing slowly because energy is scarcer and harder to liberate due to geological reasons. It will get worse from here.

[Kimmy Barter]

It's the General Malaise.

[Barry]

We need moar ALGAE!

[romulus augustus]

Joe Scarborough was making a similar lament this morning, along with urging the candidates to talk more about Obama's health care disaster and bringing the troops home from Afghanistan. I'm listening and thinking "Isn't that what Ron Paul is saying?" Sure enough, one of the other talking heads says, "That sounds like Ron Paul." And, demonstrating what the problem is, Joe Scarborough turns to him and sotto voce says, "Please, no."

[Maxxx]

Proving that style trumps message.

[Fist of Etiquette]

"Are we becoming more economically literate as a, kind of, voting population?"

Economics is a social science that no one has a complete grasp on. The U.S. economy is a river too big to manage. The more we try the closer we come to drowning.

[Realist]

FoE is correct. Economics is tenuous.

[East Bay Jay]

It's a science where at each fork of the road you have what happened and what might have happened. You can drive a continent thru 'what might have happened'.

[R C Dean]

Two reasons:

(1) The economic deadweight of the regulatory state.

(2) Generations of debt overhang. Debt is essentially time-shifting consumption from the future to now. Sooner or later, the future gets here. Guess what? Its getting here now.

[TELLMOFF]

The economy is growing too slowly because the ruling class has not fabricated enough economic great numbers. They need to read the book "1984".

[Dark Helmet]

What happened to then?

[Ken Shultz]

We won't see strong growth until the banks get all those dead assets off their books.

Getting all those homes back into the market where they can be priced and cleared should be job #1.

The Obama Administration (and others) making it harder for banks to do that is a huge cause of our sluggish economic growth. ...effectively making it harder for banks to get those dead assets off their books.

Rotosignatures are a problem? How big of a problem is people not having paid their mortgages since forever--and those assets sitting on the banks' books like a millstone?

You can't evict people because of a technicality, but on a technicality, people get to live in homes they're not making payments on until...when?

That's an issue the Obama Administration actually could have done something about--and maybe had a positive effect. But didn't.

Obama is so incompetent.

[Ken Shultz]

Meanwhile, you got the Obama Administration making it harder for people to qualify for home loans; scaring the banks into taking as few risks as possible by way of regulators; all 50 states going after the banks for the robosign issue; etc., etc.

You got hundreds of billions of dead assets attached to mortgages and physical homes clogging up the banks' balance sheets--world wide--and everybody's walking around in circles like they don't know what the problem is.

Get the deadbeats out of the homes, and get the homes onto the market to clear them. There is no other way.

Turning them into rentals won't solve the problem. Doing everything you can to keep the deadbeats in their homes won't solve the problem.

Getting them onto the market so they clear?

That's a bingo!

[Ken Shultz]

Everybody's walking around in circles like they don't know what the problem is.

Get the deadbeats out of the homes, and get the homes onto the market to clear them. There is no other way.

If Obama insists on continuing to do everything he can to keep the deadbeats in their homes--so the homes don't get onto the market and clear?

Then Obama is one of the reasons for sluggish economic growth, and we might expect to see sluggish growth continue so long as he remains in office.

I'm not a Romney fan, but I think that's the best argument for voting for Romney right there. As an investment guy, I think Romney's the guy who's most likely to "get it".

[Butts Wagner]

But if the houses are being sold for prices less than they were previously sold for, that means the economy is worse than ever...

[Ken Shultz]

One really important concept you're missing--you don't lose money when you sell something that's lost value. You lost that money when you paid for it.

In other words, those homes have already lost value. Selling them doesn't change that. They're not worth less because you sold them at the market price; the market price now is what they're worth regardless.

Another important concept--right now? With a borrower sitting in them they can't get out?

The house is worth zero. There isn't anything they can do with that asset. They can't sell it. They can't rent it out. It's worth nothing--until they get the deadbeat out.

Remember. Banks can loan against their assets at some multiple. Anything that's a liability reduces what they can lend against--reduces how much they can lend. Bad loans sit on their balance sheet like a liability.

[gaoxiaen]

Banks don't want to pay for upkeep.

[Ken Shultz]

It's not the upkeep, so much, it's the carrying dead weight on their balance sheet.

They can't lend against dead assets on their balance sheet. In fact, having a liability reduces how much they can lend by some multiple.

Banks see the performing loans in their loan portfolios as assets. Non-performing loans are liabilities.

[R C Dean]

Robosignatures is a relatively minor problem, compared to the much larger one that they are a symptom of:

The banks fucked up their claim on those houses. The validity and enforceability of a mortgage is determined by state law, and the clearinghouses the banks used to package and resell those mortgages frequently did not comply with state law. In some pools, the "error rate" is 60% or more.

So, the banks can't enforce their mortgages because they fucked up. Why shouldn't they pay the price for fucking up? If you want to argue that Its Just Too Important to require banks to comply with the law before they take someone's house, go ahead, but I'm not terribly sympathetic.

[Ken Shultz]

Then that's an issue Congress should look at. That's an issue that could have used some presidential inertia.

If Obama had spent the last three years working on a solution to those problems rather than doing everything he could to harass the banks and hamstring them? We might be out of the woods already!

The economy will not grow strongly until those assets are off the banks' balance sheets. You cannot have retail banks with tons of dead assets weighing down their ability to lend--dump tons of regulation on the investment banks' heads--and then expect the economy to grow strongly.

That's a race car with no fuel in the tank! If the problem is legal, then that's what politicians and presidents are supposed to be for. Obama's so dumb, he's doing everything he can to keep anybody from putting fuel in the tank--as if that were the solution.

[Red Rocks Rockin]

Rotosignatures are a problem? How big of a problem is people not having paid their mortgages since forever--and those assets sitting on the banks' books like a millstone?

Probably because the minute the banks actually acknowledged all those overpriced assets on their books and marked those assets to market, they'd implode. That's really what's preventing them from ramping up foreclosure activity any more than they already have.

[Ken Shultz]

There was a time when the Obama Administration was trying to stop people from marking those assets to market. That was part of the reason why the Obama Administration made it so that the biggest banks couldn't refuse TARP money--they got it whether they wanted it or not.

The idea was to force feed them cash so they wouldn't slip out of their reserve requirements. They seized Washington Mutual and sold it off for peanuts because they were afraid WaMu was about to exceed its reserve requirements--they hadn't even fallen out of line yet!

Anyway, those days are over. Non-performing assets aren't being counted for anything by anyone that matters. The only thing holding the banks back from selling is 1) not being able to evict deadbeat borrowers 2) concern about flooding certain markets with inventory.

[Ken Shultz]

The idea was to force feed them cash so they wouldn't slip out of their reserve requirements.

That's what the stress tests were all about. People should get mad to hear that the Obama Administration wouldn't let banks pay TARP money back until they passed a stress test.

That's right--the Obama Administration refused to let banks pay TARP money back for along time...for fear the bank would fall out of its reserve requirements and add to the panic or need another bailout.

[R C Dean]

Then that's an issue Congress should look at.

No, its an issue Congress should keep its greasy mitts off of, because its a state law issue. Exactly what would Congress do, that wouldn't boil down to (retroactively) stripping rights from homeowners to allow banks to enforce mortgages that the banks themselves fucked up?

For most banks, these mortgages aren't a problem, BTW, because these are the mortgages THAT THEY SOLD INTO POOLS.

They are a problem for the banks that are supposed to be "servicing" the mortgages, which is mostly money center banks. You know, the TBTF crowd that needs to be bulldozed anyway.

[Ken Shultz]

If ever there were an argument for the federal government to regulate interstate commerce, then this is probably it.

If we want to see the economy grow strongly again, and be quick about it, that's what needs to be done.

Waiting for the states to decide whether the banks can have their homes back--despite the borrowers not making any payments--isn't about to solve the problem.

I would much rather have seen the federal government get involved in this than...

TARP
Obama deciding to turn deadbeat homes into rentals.
Consumer Financial Protection Agency
Dodd-Frank
etc.

If Obama could do all of that crap? He could have done something intrusive to actually address the problem instead.

The solution where no one does anything was never on the table. It was possible to be both intrusive and smart about it--but Obama wasn't any of that.

[R C Dean]

If ever there were an argument for the federal government to regulate interstate commerce, then this is probably it.

So, you're going with "Its Just Too Important to require banks to comply with the law before they take someone's house", then.

[Ken Shultz]

Only if you're going with "It's Just Too Important to require banks to eat the price of a home".

These people aren't making their payments. And they know they aren't making their payments.

And it's not their house! The house belongs to the bank. The bank paid for the house. In the end, after all the legal hassles, the house belongs to whomever paid for it.

Not to whomever is living in it for free.

[Ken Shultz]

For most banks, these mortgages aren't a problem, BTW, because these are the mortgages THAT THEY SOLD INTO POOLS.

Example:

With the 2007 acquisition of Countrywide, Bank of America is on the hook for billions of dollars of toxic delinquent mortgages. In 2010 alone Bank of America's home lending department lost $8.9 billion...Ten million new subprime mortgages reset in September, and many will continue to reset every month until May 2012....

...Currently, Bank of America's mortgage default rate sits at 4.71%. Its...mortgage debt is $258 billion dollars and its home equity loans total $138 billion. These amounts exclude off balance sheet liabilities related to countrywide.

http://seekingalpha.com/articl.....of-america

[Ken Shultz]

Remember, many of these lenders had to buy those securities back at par if a certain threshold of the borrowers stopped making payments in the first year, whatever...

That's what broke New Century, et. al. The subprime crisis struck a year before Lehman cratered when New Century and other subprime lenders had so many redemptions, they couldn't raise the money to buy them back as they were contractually obligated to do--and went bust.

A lot of institutions were left holding the bag when those subprime lenders went bust. The government bought a lot of that paper back--but not all of it. It's still sitting out there, rotting on someone's balance sheet, and presumably the people who they can't evict for odd legal reasons are highly represented among those rotting securities.

[Ken Shultz]

A lot of institutions were left holding the bag when those subprime lenders went bust.

But they didn't have to worry about that--because they had insurance!

[R C Dean]

When I point out that the clearinghouse fuckup is mainly an issue for money center banks, you reply with a post showing that, yes, indeed it is a problem for money center banks.

Point taken.

As for lenders who had to buy MBS's back if a certain percentage of the pool went tits up, well ,that really has everything to do with loans that failed, and nothing to do with the fact that the underlying mortgages may well have been invalidated by the clearinghouse process.

A lot of institutions were left holding the bag when those subprime lenders went bust.

Indeed they were, including (again) the money center banks at the middle of this mess, and the institutional buyers who got stuck with busted MBS's.

Why the solution to this is to set aside state law to allow invalid mortgages to be enforced, is not clear to me.

[Maxxx]

Because the money center banks are too important to follow your measly laws, peon.

[Ken Shultz]

Why the solution to this is to set aside state law to allow invalid mortgages to be enforced, is not clear to me.

I'm not saying that's the ideal solution. It is a practical solution that has one feature that none of Obama's solutions have had--it actually addresses the problem! It actually addresses the reason why the economy has experienced such anemic growth and will continue to do so.

In my opinion, Obama has done much worse things--to solve the housing crisis--than step on the states' toes by way of the commerce clause. If I could trade all the other garbage he's done that doesn't address the problem for that one thing? Yeah, I'd take that deal in a heartbeat.

[Ken Shultz]

Meanwhile, what's your plan for cleaning this up? If those homes sit in limbo for another five years holding the economy back the whole time--until the states decide to stop litigating, do the right thing and give the banks the homes they paid for? Are you willing to settle for that?

Litigation will not solve our economic problems. Who's to blame isn't anywhere near as important as stopping the damage. And the solution is still nowhere in sight.

We could stagnate for a decade or more like Japan did if we don't get those assets off the banks' books. And I'm not interested in the taxpayers bailing them out. If the solution isn't that the homes go back to lender--when the buyer isn't making any payments--then what the hell is the solution?

Why should we wait for all fifty states to figure out the obvious?

[Richard]

The notion that real-estate transactions constitute interstate commerce is a fallacy. The foundation of real-estate title resides in the county recorder's office. It is the county sheriff who has jurisdiction. Real-estate cannot be transported across state or county lines. That system is not broken. If you do not record your title, you have no standing. It is your own damned fault.

Where do foreclosures happen? At auction on the county courthouse steps. This whole mess was created by Congress, Banksters, and Securities Gamblers. To fix it people need to do the hard work of perfecting the chain of title under the existing property rules. If fraud has been committed, go directly to jail, do not collect $200.

Congress created this mess under the CRA. CRA forced banks to make loans to unqualified buyers. Congress cannot/will not fix the mess they made.

[cubanbob]

every one of these loans and every bank that made them was blessed by the regulatory agencies that congress created and congress can and should own up and resolve these issues.

[Tony]

If taxes on wealthy people were higher, the economy would be in better shape.

Plus, I still want that pony.

[shrike]

It's because of all the Christ-fags.

[Warren Buffett]

You're late, shrike. You were supposed to service me over an hour ago.

[Barry the Jaunty Future King]

Mind your place, Warren.

[cardboard displays]

In my opinion, Obama has done much worse things--to solve the housing crisis--than step on the states' toes by way of the commerce clause. If I could trade all the other garbage he's done that doesn't address the problem for that one thing? Yeah, I'd take that deal in a heartbeat

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[alaamiah]

politics, and fiscal policy. He sat down with Reason.tv's Nick Gillespie to talk