Double dip housing recession?
Posted: Friday, August 13, 2010 8:02 pm
By: Douglas Cohn and Eleanor Clift
By DOUGLAS COHN
and ELEANOR CLIFT
WASHINGTON — President Obama is getting through Congress most of the legislation that he said he would, and he’s doing it at a particularly nasty and partisan time in our politics. Yet the voters are not giving him much credit. They are focused on the central issue of our time, the stubbornly high jobless rate and the administration’s inability to get banks lending again and businesses hiring, the essential ingredients of any recovery.
After the near collapse of the financial system, new rules were needed to regulate derivatives and protect consumers, and Obama can rightfully claim a victory in achieving the most far-reaching financial reform since the Great Depression. Now the bureaucrats will get to work writing the regulations to implement the legislation, and that’s where the law of unintended consequences could take hold. The problem is that some of the regulations are going to make it harder, not easier, for consumers to get loans, especially real estate loans.
The Republicans have done a good job portraying everything Obama does as a big government takeover, and it will take months, even years, for people to feel the benefits of Obama’s policies in their lives. That’s the way legislation works; it’s big and complicated in a country of 300 million people, and an army of bureaucrats must now get to work translating legislative intent into the new rules and regulations that will govern the marketplace.
On the financial front, Obama is trying to restore a better balance between corporations and the government after a decade or more of Wall Street operating with virtually no oversight. Taxpayers bore the brunt of the bailouts that began during the final days of the Bush administration, and continued into the Obama administration in a bipartisan attempt to stabilize the financial system.
Federal Reserve Chairman Ben Bernanke testifying on Capitol Hill on Wednesday downplayed the likelihood of a double dip recession, but the worst may not be over, and ironically, Obama’s overhaul of the financial system could contribute to what appears to be a looming double-dip collapse of the housing market.
In the long term, reform is necessary, but in the short term, the legislation Obama signed Wednesday at the Ronald Reagan building in downtown Washington will make it harder for prospective home buyers to get credit, thereby tightening down on the housing market when we need the opposite, a loosening of credit to get the recovery going. Interest only loans and loans made without proper documentation contributed to the toxic assets that banks are holding, and that weighed down the system, but without those financial incentives, cash-strapped consumers are likely to sit on the sidelines of an already weakened housing market.
The new legislation is only one piece of the consumer malaise. Once high unemployment is factored in along with small businesses struggling for cash and homeowners borrowing against homes that are now undervalued, an already sick market becomes further stressed. The administration sounds foolish when it says, “We are going to help potential home buyer by stopping banks from offering interest only, low-documentation, low downpayment loans.”
Maybe this is the short term pain the country and the housing market need to go through, but for Obama to claim financial reform as a political victory, he will have to be very clear about what’s in it for the average American. The bill is historic, no question, and when he signed it, Obama touted the newly-created Consumer Financial Services Bureau that is a centerpiece of the bill.
It will protect the American people against predatory lending and excessive credit card fees. The bill will also make it harder for financial institutions to grow too big to fail, and easier for government to dismantle failing institutions without drawing on taxpayer money.
These are all good things in the long term, but in the short term, homeowners who owe more on their homes than they’re worth, and prospective home buyers who find it tougher to get credit, will probably blame Obama instead of the high-flying Wall Street crowd that created the problem in the first place.
Published in The Messenger 8.13.10