I had the opportunity to hear John Mitchell’s economic forecast at the Sterling Savings Bank November 3rd breakfast meeting. John always does an excellent job making a boring topic interesting. There were no surprises in his presentation about the current economic situation, the gist of which was, the U.S. economy is growing, albeit at a slower rate than one would hope.
But I didn’t go to hear John Mitchell talk about our current economic situation. I went there to hear what he thinks will happen going forward. Accurately forecasting future economic trends splits the men from the boys, which reminds me of the Yogi Berra quote: “It’s tough to make predictions especially about the future.”
Not surprisingly, John Mitchell didn’t go out on a limb making any bold predictions about our economic future. Economists as a rule are not known for being risk takers. But in fairness to John, he did identify several issues that could influence the economy for good or for ill. I would like to focus on two of these challenges. If these issues are handled properly it would have a positive long-term impact on our economy.
Opportunity #1 – The Housing Crisis
As John Mitchell pointed out, 17% of all homes in Oregon and 22% of all houses in the U.S. are underwater, i.e., homeowners owe more than their houses are worth. Until this crisis is resolved, house prices will not bottom out, let alone begin to appreciate in value. And until house prices begin going up most Americans will not have the confidence that the economy has turned the corner regardless of what the economic numbers may say.
One proposal that would go a long way to resolving the housing crisis is writing down some of the principal on these underwater mortgages. It is estimated that 10 million out of 55 million mortgages are likely to default. The single best indicator of whether a homeowner will default is the size of the imbalance between what is owed and what the house is worth. Reduce the size of the imbalance and there will be fewer defaults. Fewer defaults would be a major step in stabilizing house prices.
Banks hate this idea and would rather continue with the status quo. The solution: Leaders in Congress should propose legislation that will allow banks to quickly write down mortgages in a manner that doesn’t punish the banks’ long-term viability. The alternative is continued stagnation in the housing market.
Opportunity #2 – The Congressional Supercommittee
As you already know, the congressional supercommittee has been given the task of proposing a combination of $1.2 trillion in spending cuts or revenue increases over the next 10 years. Their deadline to make their proposal before Congress is November 23rd which is fast approaching. Most economists believe that anything less than a $3 trillion package will be perceived by the market as little more than putting a band aid on a gaping wound. Failure to come to some agreement will likely increase our chances of a further downgrading of our nation’s credit rating.
I hope that those on the committee are closely watching the debt crisis in Europe unfold. Just in the last week both the Greek and Italian leaders have been forced from office. Europe is in the throes of a financial crisis. We could be next. Compromise, a word that is now considered a pejorative by many, needs to happen between Republicans and Democrats in order to get anything through the supercommittee that has a chance of passing both houses of Congress.
Both of these issues are at major crossroads. And both of these are opportunities to be seized or to be squandered. If those in political power show some leadership they could help turn our economic ship around.
Sources: Aftershocks, Oil Shocks and the Long Good-Bye, by John Mitchell, November 3, 2011; A Good Idea in Principal, by Joe Nocera, The Oregonian, November 8, 2011.