Continuing with our Groundhog Day theme – where change is part of life – we return to our housing crisis where the spillover effects from the finance sector into the “real” economy are now putting the $750 billion student loan program at risk of serious default as a function of a weak jobs market. Recent college graduates and a growing sector of the American population are becoming like Bill Murray in Groundhog Day – members of the “frozen class” – people trapped in a Japanese style liquidity rut – a cash hoarding, non-consuming, non-investing phenomenon we call the Great Recession.
As we noted in this blog earlier this week, the dangers in housing were well-known before the current crisis. Today the New York Times has published further evidence the Federal Reserve Bank’s 2006 sanguine approach to the issues on the ground and over reliance on busted economic models allowed for a hubris that trumps even the self-satisfied Phil Connors, Bill Murray’s character in Groundhog Day. In finance, the value and service central bankers are supposed to deliver include judgment, wisdom, experience and prudence. They need not be humorless, but per the Times, the Fed was stuck in a Phil Connors-like self-confidence rut.
Housing, and how it is financed, remains the most uncertain element of our economy. Uncertainty may be everyday life in Washington, but it freezes private capital. Now that the pristine borrowers who fit government loan programs have been refinanced, the housing sector is left with millions of properties (historically served through private sector loan programs) without access to liquidity. This adds another segment of the population to the “frozen class.”
Absent consumer demand, the private sector continues to hoard cash because every day is Groundhog’s Day. For consumers, investors and the government, the decision and commitment processes have become frozen. All choices appear to contain an element of poison, but failure to choose leaves us stuck.
In the end, a cocktail of poisons will be required to thaw our markets. Some challenging choices include:
- Restoring life to the frozen class by: raising their wages, reducing their debt, and/or restructuring the debt overhang (trading a reduced debt for equity appreciation rights – addressed elsewhere in this blog). The key in choosing, as in Groundhog Day, is to commit to do something that will force a different outcome.
- We will soon have more empty homes (REO) than homeless people. Many families are doubled up. We need to reverse this trend by making household formation more economically feasible. The Federal Reserve’s REO to Rental Program suggestion, which is drawing so much political heat, is Uncle Ben’s attempt to have America not wake up with the same housing mess it goes to bed with each night. He senses, I think rightly, the nation’s social fabric can’t afford the busted market’s “clearing price” any more than we could afford the Fed’s original sanguine approach to the housing crisis. The REO issue is serious – it has Great Depression damaging potential for an already weak housing sector.
- Only the federal government can finance a Resolution Trust Corporation & FDIC program to seize the “zombie” institutions which the market has identified as frozen and in need of change through their price to book values. Buy them, break them up along diversified, but manageable lines, and resell them as smaller, more transparent institutions with a government stake in the reorganized ventures. Such an effort would demonstrate to private capital and foreign investors we are planning our future rather than delaying and praying tomorrow won’t be another Groundhog Day. This option is important to consider now while foreign governments still finance American’s deficits at such low rates. If we wait, as Europe has done, until there are no options, we may find the next step in our reforms even more punishing.
More to come…
 Graham Fisher link