Fed Chief Dismayed by Continuing Housing Slump. I’m Scared

(LoanRateUpdate)

Federal Reserve Board chairman Ben Bernanke, in testimony before the Senate Banking Committee, said he is dismayed by the persistence of high foreclosure rates, declining home values, and the futility of government efforts to engineer a recovery in the housing market.


The Fed chief told the Committee that the Treasury Department has been very innovative in devising loan modification and other programs to address foreclosures. “There have been sincere government efforts to address the problem but they run into lots of bureaucratic and other difficulties,” Bernanke testified.

“Particularly in a world where unemployment is 10%, it is very difficult to find a solution,” he said. (On Friday the government said the national unemployment rate had fallen slightly to 9.4% because more Americans have given up on their effort to look for a job.)

It seems the man who might ultimately be the most powerful man in American, and perhaps the world, is not capable of understanding basic economic fundamentals. And that’s why I’m scared.

It’s the economy stupid.

I personally have lived through and experienced several economic downturns in my many years (51 of them) and even though I am no professor of economics, I’ve certainly witnessed what works and what doesn’t.

Let’s take a stroll down memory lane…

Back in the ‘70’s we had the Jimmy Carter recession. Up until that time, it was considered the worst economic downturn since the Great Depression. What was the economic philosophy of the day? Give money to the banks and it will free up capital and result in more money for businesses to borrow and kick start the economy. Sound familiar? Yeah, it didn’t work then either.

The voters gave Carter the boot and Ronald Reagan came in, modified the tax code and cut taxes and the greatest economic expansion in the history of the United States incurred. Just a foot note here. One mistake Reagan did make that history will prove we did not learn from…don’t tinker with the banking industry. By freeing up the Savings and Loan industry to engage in business outside it’s traditional role, it resulted in the famous Saving and Loan bailout. You’d think we would have learned the first time.

Along came the George Bush One recession and the famous quote and biggest mistake of his Presidency, “Read my lips, no new taxes.” Well, we all know what happened after that. Instead of cutting taxes to spur economic growth, he raised taxes and the economy tanked…and he became a one term President. Ironically, before Clinton was inaugurated, we had nine months of economic growth.

Why mess with success? (Just being sarcastic) The economy is expanding when Clinton takes office but he follows Bush, he raises taxes and then embraces Jimmy Carter’s economic philosophy of giving money to the banks hoping to free up capital. The economy goes into a double-dip recession which two years later leads to the Contract with America, Newt Gringrich, and the loss of both houses to the Republicans, To save himself, Clinton becomes a centrist, listens to Newt, cuts taxes and becomes the savior of the 90’s. One problem…he leaves a nose-diving economy for George Bush Two. Footnote two…remember what I said about tinkering with the banking industry? Repealing Glass-Steagall would be a huge mistake in the years to come.

Bush Two doesn’t hesitate, he cuts taxes. Let the good times roll. Footnote three…If you cut taxes, you have to cut spending.

Remember the Great Depression? Of course you don’t! Most of you reading this weren’t even alive to experience that (that includes me!) But here’s a little known fact; from 1929 to 1933 the federal government raised the lowest tax rate from 0.375 percent to 4 percent (over 400%) and the highest tax rate from 25 percent to 63 percent. By 1939, they raised the lowest tax rate another 10 percent and the highest tax rate stood at 75 percent. Not only did the poor get poorer, the rich got poorer. Any wonder why it was the greatest economic downturn in history. Remarkably, the economy actually started expanding after 1933, but the tax increases in 1936 led to an additional recessionary period in 1937 and 1938.

So when Bernanke talks about the “sincere government efforts” to address the housing crisis he must be talking about the first time buyers program that helped a very limited few and loan modification programs that haven’t even come close to meeting their goals because there is no requirement for the mortgage servicers to be active participants in it unless it works to their benefit.

Wow! Talk about instilling confidence!

But seriously, as I said before, I’m no economics professor but I can guarantee you I know exactly what can end the economic and housing crisis…JOBS. How do you create jobs? Stop bailing out the banks and start bailing out the taxpayer. I think we would all have to agree that long term, across the board tax cuts have been the most effective way to stimulate the economy and create jobs.

So while Bernanke testifies before the Senate Banking Committee worrying about stress testing the banks due to falling home prices, perhaps he’d kindly like to reveal why he gave $3.3 trillion of taxpayers money in secret bailouts to Wall Street…or maybe he’s saving that for Ron Paul. Has the economy gotten any better because of it? No, but Wall Street has gotten a lot richer.

So where do you think the economy and the housing crisis would be if they had given that $3.3 trillion to the taxpayers instead of the banks?

Tags: housing crisis, bernanke, loan modification, first time buyers, declining home values, economic downturns, recession, great depression, wall street