Ezra Klein wrote a nice piece yesterday arguing that the big problem in the recession was housing debt and the central failure of Obama's economic policy was ignoring this big problem.
Here's his synopsis:
The precise nature of the administration’s misunderstanding was that the key problem was household debt, and until that problem was solved the economy couldn’t recover. But while it had a clear strategy for attacking bad debt in the banking system, and a clear strategy for attacking the fall in consumer spending, it never had a clear strategy for reducing housing debt.
He then points out that there are really no politically viable solutions to "bad" housing debt.
And indeed, what occurred was the bursting of a massive bubble in housing that left us much poorer than we thought we were. And since houses are relatively non-liquid assets, and often the main savings vehicle for many households, that bursting has long lasting ill effects on the economy.
I agree that ex-post, it's a very hard problem to solve and stay in office. Ezra talks about the massive forgiveness paid by the taxpayer approach. The other extreme is the get tough, foreclose like crazy, put it all behind us ASAP approach. We muddled through somewhere in between, though closer to option II than option I.
The best policies here are ex-ante and preventative. Looking back, perhaps the Fed should not have kept rates so low for so long, setting off a desperate search for yield that engendered a massive demand on Wall St. for mortgages to repackage. Perhaps the rating agencies should not have granted AAA status to synthetic instruments that they did not understand. Perhaps regulators should not have turned a blind eye to the blatant level of fraud that was occurring in the mortgage market. When a whole category of loans is referred to as "liar loans", that might be a problem down the road.
And of course, none of these policy failures can be reasonably laid at President Obama's door, but as Ezra points out, they are a factor in this pitiful recovery which undoubtably will hurt Obama in November (I don't agree with Ezra that Obama has no other significant economic policy failures, but I'll save that for another post).
It was often said that the role of the Fed was to take away the punch bowl just as the party was getting started. That clearly did not happen, nor did any of the other regulatory agencies or politicians show any inclination to get the country to drink responsibly.
So here we are. What do we do?
Krugman and Eggertsson have a new paper arguing that in our current predicament (which they, like Ezra attribute to excessive private debt) more government borrowing and spending is a very effective policy tool.
As I see it, this path seems unlikely to be taken without a Democratic sweep of the election.
So here we are. What do we do, or stop doing? Tell me in the comments!