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06/26/2012

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.



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