Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way

Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way


by Joe Weisenthal at Business Insider

http://www.businessinsider.com/economists-on-obamas-failure-to-address-mortgage-debt-2012-11

"SNIP..........................................

In fact, there is no need to turn to implausible underwater mortgage debt explanations for the weakness of the economy. The economy is acting exactly as those who warned of the bubble predicted. We saw a sharp falloff of residential construction as we went from a near record boom, with construction exceeding more than 6.0 percent of GDP at the 2005 peak, to a bust where it fell below 2.0 percent of GDP. This meant a loss in annual demand of more than $600 billion a year.

We also saw a large falloff in consumption due to the loss of $8 trillion in housing wealth. The housing wealth effect is one of the oldest and most widely accepted concepts in economics. It is generally estimated people spend between 5 and 7 cents each year per dollar of housing wealth. This means that the collapse of the bubble would be expected to cost the economy between $400 billion and $560 billion in annual demand.

There is no mechanism that would allow the economy to easily replace the combined loss of between $1 trillion and 1.2 trillion in demand that would be predicted from the collapse of the housing bubble. Therefore it is hard to see why anyone would feel the need to look to explanations involving the indebtedness of underwater homeowners, the whole downturn is easily and simply explained by the collapse of the bubble.

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Bigger picture, when people talk about "the debt" these days, they're probably talking about The National Debt, even though it really doesn't seem connected at all to the problems of the economy. Homeowner debt, however, is a real burden. There may not be much plausibly that can be done, but it should get much more attention.

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