There’s an old saying that goes something like this:
Will you stop pissing on me and calling it rain?
Bernanke said in his speech on April 13, at a conference sponsored by the Russell Sage Foundation and the Century Foundation, that “any theory of the crisis that ties its magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth — more than $8 trillion — resulted in a relatively short and mild recession and no major financial instability.”
The Fed chairman is right: The housing crisis was much more damaging because the initial impact was concentrated in a highly leveraged financial sector and then substantially amplified as those losses cascaded.
The rest of the column is basically a scolding on the “miss”, ignoring the real policy question that should be debated and answered:
How did it come to be that one of the key items for every person’s personal comfort and indeed their life — housing — came to be a “highly-leveraged financial sector”, what intentional government distortions made this possible, and how do we withdraw those distortions so that (1) it doesn’t happen again and (2) necessary components of everyday life — such as housing — are not subject to the rank manipulations of this sort in the future?
But this debate is not being held — on purpose — because to do so exposes the soft underbelly of far too much for comfort among the so-called “financial elites.”
Housing should not be a materially-levered part of the economy. Unlike commercial real estate which can bend and flow with demand — when the local bar goes out of business if there are no others in town someone will soon decide that opening a watering hole makes sense — housing displaces people on a permanent basis and does critical and personal damage to the nation’s population when leverage is abused in this area of the economy.
It was, to a large degree, this same sort of leverage abuse in the 1920s with balloon mortgages (that had to be rolled every five years or so) that led to the Depression being as nasty as it was. The “Hooverville” shanties popped up due to people being displaced — and they were displaced because the nation’s housing stock became financialized and levered from the consumer on up.
The Government of course tried to “fix” the problem with FNMA, now known as “Fannie Mae”, which was originally created to try to bail out banks during The Depression. This eventually led Fannie to be levered 80:1 by the time 2007 rolled around and, ultimately, was responsible for its collapse.
So what’s next?
Good question. This much I can tell you with certainty — there has been no recognition among the policy wonks, nor any attempt to correct the problem with leverage in the housing sector. In fact the exact opposite has happened — the government has, to the maximum possible extent, done everything in its power to prevent that leverage from coming back out!
It’s not working because it can’t work.
And this morning’s ADP number simply underlines the point — until we stop screwing around with trying to protect financial “bigwigs” from the consequences of their own acts and this leverage comes out of the system there will be no economic recovery — because there can’t be.