Federal Reserve Chairman Ben Bernanke's most recent speech in Kansas City rehashed many of the issues that the U.S. economy has faced in recent years. The bulk of his comments pertained to the Fed's past efforts to stem the recession, but his statements about our current condition seemed to contain a bit of a mea culpa. It might be summarized as "We dropped the ball on housing."
With hindsight in perfect focus, Bernanke stated that he recently "learned that the recession was even deeper and the recovery even weaker than we had thought." While his words were more like those of a detached observer than the head of a major financial force, he went on to explain why previous policy strategy has not quelled the economic downturn:
"...the recession, besides being extraordinarily severe as well as global in scope, was also unusual in being associated with both a very deep slump in the housing market and a historic financial crisis. These two features of the downturn, individually and in combination, have acted to slow the natural recovery process."
"Notably, the housing sector has been a significant driver of recovery from most recessions in the United States since World War II, but this time–with an overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and ongoing concerns by both potential borrowers and lenders about continued house price declines–the rate of new home construction has remained at less than one-third of its pre-crisis level. The low level of construction has implications not only for builders but for providers of a wide range of goods and services related to housing and homebuilding. Moreover, even as tight credit for some borrowers has been one of the factors restraining housing recovery, the weakness of the housing sector has in turn had adverse effects on financial markets and on the flow of credit. For example, the sharp declines in house prices in some areas have left many homeowners “underwater” on their mortgages, creating financial hardship for households and, through their effects on rates of mortgage delinquency and default, stress for financial institutions as well. Financial pressures on financial institutions and households have contributed, in turn, to greater caution in the extension of credit and to slower growth in consumer spending."
With the housing market now a priority, Bernanke did offer some direction for the solutions needed to create a true recovery. His closing statements on the housing market are some of the strongest we've heard in support of proactive housing policies as a fix for much of our economy's ills. Jobs will always be the primary issue, but housing has a large role in the employment market, as a wide variety of real estate-related jobs have been lost during this recession. More importantly, real estate is one of the largest segments of consumer spending, a necessity in any healthy economy.
"Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if–and I stress if–our country takes the necessary steps to secure that outcome. Over the medium term, housing activity will stabilize and begin to grow again, if for no other reason than that ongoing population growth and household formation will ultimately demand it. Good, proactive housing policies could help speed that process."
Bernanke is not a firebrand speaker, and when he "stresses" something, he does so at an even keel. However, his emphasis is telling. The economy will not recover fully until Americans are not only working, but are also confident that their homes and their financial savings are safe. Strong housing and employment markets are major, interconnected drivers of healthy economic activity. We can' t have one with out the other.
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