The REAL Reason Recovery is Slow

...from Auto Finance News...

2012 June 2012 was a huge news month. The 2012 Presidential campaign is always good for news, the Miami Heat won the NBA Championship, we had fires and storms, and the Supreme Court issued to important rulings on the Arizona illegal immigration legislation and the Federal health care reform bill commonly known as ObamaCare. Lost in all of this was a report released by the Federal Reserve Bank which dealt with the issue I believe is the real reason for the slow recovery. It’s not taxes. It’s not regulation.

The Federal Reserve report that shows a decline of almost 40% in household net worth from 2007 to 2010. In that time span American’s household wealth dropped to a level not seen since 1992, mostly driven by the precipitous drop in home values due to the bursting of the housing bubble. Eighteen years of gains were wiped out.

The new data comes from the Fed’s Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families. Families with incomes in the middle 60 percent of the population lost a larger share of their wealth over the three-year period than the wealthiest and poorest families. This is typically the group that drives consumption in our economy. Given the scale of this loss of household net worth and in the face of other headwinds like the European debt crisis, it is a wonder we have had the recovery we have had.

Unless one belongs to what some call the “Field of Dreams School of Economics”, (If you build it they will come), one probably believes that the country’s recovery is stymied by weak demand. This Federal Reserve report quantifies the reason for that weak demand.

In the midst of the current Presidential election we haven’t heard much from either candidate on the subject. Mitt Romney seems to want to hasten the foreclosures and subsequent sales to get deficiencies established so the “bottom” can be reached. I’m not sure that carries favorable political resonance but he said as much during a recent interview. Romney regularly states he thinks that it is taxes, threat of taxes, and regulation holding the economy back, not the evaporation of household wealth. But he can gravitate from being a “supply sider” to a “demand sider” in the blink of an eye.

President Obama has offered up some measures to help keep people in their homes, like the Home Affordable Refinancing Plan (HARP). While HARP and other programs carry positive humanitarian considerations, they might be helping to extend the problem. Unfortunately, it won’t be good for the country if we use the high point of the bubble, 2004 – 2007 as our economic benchmark. The consumption of that era was based on many Americans using their home equity as an ATM machine. A return to those days would mean we would be on the edge of another disaster.

Until consumers feel confident and “wealthy” enough to begin robust consumption, recovery will continue to inch along despite immense pent up demand. Real recovery depends on home values.

The complete report can be found at the link: http://www.federalreserve.gov/releases/z1/current/z1r-5.pdf

PS: For more on the impact of this sort of decline in wealth, readers might look at the following post on a survey of "balance sheet recessions." As far as I know -- I happened to be at an early presentation of his in Tokyo in 1992 -- the term was coined by Richard Koo. The blog entry which provides a non-technical overview of this survey is HERE.

Mike Smitka

...see the companion blog usandeconomics.blogspot.com on RomneyCare...