Larry Summers (via Calculated Risk) says a key objective of economic policy must be to:
…address the problem which has, frankly, gone unattended for much too long of declining house prices.
Calling planet earth… Housing prices – according to even a cursory reading of say the Case-Schiller Index – have a long, long way to come down, and until then the economy simply cannot be reset for growth.
We won’t recover until we move beyond the fictitious asset bubble economy, as Nouriel Roubini outlines:
For the last 30 years the US has been growing fast only during periods of asset bubbles that eventually burst with significant economic and financial costs. The 1980s real estate bubble went bust in the late part of that decade leading to a severe banking crisis for the Savings and Loan banks, a credit crunch and a severe recession in 1990-91; next the 1990s tech/internet bubble went bust in 2000 leading to the 2001 recession; massive monetary and credit easing – as well as lax supervision/regulation of mortgages and credit – led to another housing and credit bubble that has now gone bust creating a severe financial crisis and recession.
The current monetary easing may lead to another bubble but we are somehow running out of bubbles to create … We need to create an economic system that is less prone to bubbles and more likely to lead to sustainable stable growth.
For the last few years the US has overinvested in the most unproductive form of capital – residential housing stock that increase utility but not labor productivity – and not enough into physical capital that increases the productivity of labor.
Also we overinvested in the financial sector, a corollary of the housing boom … And having a country where there are more financial engineers than computer engineers or mechanical engineers means a misallocation of human capital as well.
So we need to create a growth model relying less on housing/real estate, less on finance and less on having the brightest minds of the country going into financial services rather than into the production and innovation of new and improved goods and services.