Housing Bubble Created Nation�s Major Problem
Prior to the recession the housing bubble had been driving the
economy through several channels, including the near record pace of
housing construction. The housing wealth created by the bubble, led
to a huge surge in consumption. (People borrowed against their
equity or decided they didn�t need to save for retirement with price
increases of 15% to 20% a year.)
When the bubble burst the downturn troubles began. The problem now
is how to get back to the days of consumption (demand). It�s a
totally different situation today as millions of people have less
wealth (home equity) and the baby boomers are approaching retirement
with almost nothing but Social Security to support them.
We are now into a long-term unwind of household deleveraging, and
until we�re through that we�re not going to see a rapid expansion of
consumption. In other words, the rate of consumption growth, which
accounts for two-thirds of the economy, is going to be slow.
Since the consumer cannot supply the needed growth, the two
remaining alternatives to boost our economy are foreign sales (which
require the dollar falling in value relative to other currencies)
and government spending in order to fill the gap in consumption
demand created by the housing bubble.
According to Dean Baker, an economist and co-director for Economic &
Policy Research, that is the simple reality that neither political
party is willing to tell the people.