As a real estate vendor whose license hangs on my broker’s wall gathering dust I sure hope Harlan’s prediction of a recovery in real estate comes true. I sell in what was until 2007 one of the three fastest growing real estate markets in the country, Ft Myers, Florida.
While Economic Counselor at the American Embassy in Helsinki I wrote a periodic article for Finland’s largest circulation newspaper. I recall writing in late 1982 that we would see strong recovery in the badly damaged US economy in 1983, a bold prediction. I said that those who invested at that time would reap big rewards in the ensuing year. I proved to be right on the money (pun intended).
Later in 1983 I staged a talk to a group of Finnish businessmen by the chief economist for the US Chamber of Commerce who said the recovery began in November 1982 as I chimed in with the same date. So how did we both know when the recovery began?
In mid-1982 I had to arranged the visit of then Treasury Secretary Reagan and Federal Reserve Chairman Paul Volcker to Finland for a major conference on the world’s economy. I rode in the same car with the two men and took advantage of the situation to ask Chairman Volcker, “Mr Chairman, when will you lower the Fed interest rate?” It was the critical question, since Volcker had raised the rate to the point that home mortgages carried double digit interest rates in his campaign to control inflation. He did not answer me nor did he answer President Regan when he asked the same question. But he finally did lower the rate in, you guessed it, November 1982.
The result of Volcker’s relenting and lowering the Fed rate was immediate. The economy grew by, I seem to recall, 10% in 1983, a spectacular recovery. And the recovery was based on one single number, housing starts doubled in 1983. The dramatic rise in housing starts was just the right fuel to get the whole engine running in overdrive.
So now we have Fed Chairman Bernanke stating that housing must lead economic recovery. However, there is a big difference, the Fed rate is already at less than 1% so he has no magic to lend to the system. He can but plead for lenders to open their coffers to home buyers, but the lenders are still smarting from the burst housing “bubble” and are definitely leery of lending on the scale reached in 2007.
Here is where my constant mantra comes into play again. I have repeatedly cried that the “Financial Meltdown of 2008″ and the “Great Recession of 2009″ did not come from lending too much to home buyers. Rather the economic catastrophe was caused by bond analysts using flawed algorithms to downgrade bonds based on mortgages, usually called “mortgage backed securities or assets, ” to “junk status.” It was this rating mistake that led to the financial breakdown and subsequent recession, not the actual amount of lending.
With this in mind I can confidently state that I have no problem with opening the gates to massive mortgage lending to revive the economy, as suggested by Bernanke. However, we must keep a close eye on this business and avoid having bond analysts call the shots.