Imbalances in the Post Crisis

World leaders want the Chinese to buy more and save less. You won't hear them say that outright, but that is what statements like the following from President Obama’s June 18 letter to the Group of 20 mean: “A strong and sustainable global recovery needs to be built on balanced global demand.”

It's simple, really. The Chinese are the world's largest market and some of world's biggest savers. If only they would shed their frugal ways and consume more, the world economy would get a nice big boost. (They might be able to as Beijing has said it will allow the renminbi appreciate in value, which should make imports cheaper in China.)

The other side of this story is, of course, that Americans, traditionally the world’s top spenders, are no longer able to borrow and spend willy-nilly. Seriously wounded by a historic economic recessions, U.S. consumers cannot be expected to drive global demand.

Americans aren't exactly counting their pennies -- the U.S. economy is recovering thanks primarily to an increase in personal consumption expenditures. But fewer Americans can afford to spend like they used to thanks to much shallower pocketbooks.

Unemployment is an obvious reason as it remains at nearly 10 percent since June last year. That means that 15 million people in this country have no steady income and may not have it for some time. The White House predicts that it will take eight years for unemployment to fall to pre-crisis levels.

But the biggest hit to wealth or perceived wealth has come from the American home. Strong consumer spending and access to credit in the past have been associated with high equity and elevated housing prices. To those two wealth factors the burst of a housing bubble and the subsequent recession were devastating.

According to the Federal Reserve, U.S. homeowners have lost $6.9 trillion in equity since 2005. In other words, half of the principal source of wealth for American households vanished.
A new report by the Center for Responsible Lending projects that about 10 percent of U.S. households, between 10 and 13 million, will foreclose by the time the crisis ends. What’s more, the millions of Americans affected may need as many as seven years to be able to buy a home again.

The outlook is grimmer for those close to retirement, according to Keith S. Ernst, an author of the CRL report. For many of them the “opportunity may really never materialize again to be a homeowner,” he said in an interview.

It is unlikely American consumers will resume their spending with great confidence before they regain some of the equity lost. They will also need to trust that what equity they have won't slip away just as it did before.

As part of new financial reform legislation, Congress has set out to create the Consumer Financial Protection Agency that would set standards against predatory lending. The hope is such an agency would prevent a similar crisis from happening in the future.

The new agency has its opponents, of course, and they argue that it wasn’t a lack of government regulation but too much government intervention that caused the crisis. Had the government not pushed lenders to serve underserved communities many would not have bought what they could not afford, they say.
Certainly, minorities have been disproportionately affected. According to CRL, 17 percent of Latino homeowners and 11 percent of African-American have lost or at imminent risk of losing their houses, as opposed to 7 percent of non-Hispanic white homeowners.

But it is foolish to put corporate greed at the government's feet, as the opponents of the new regulatory agency would do. To protect American equity is in all our interests and a knee-jerk dislike for government doesn't change that.

Recovery in America will depend in some cases on the government's ability to intervene. As Ernst describes it, many communities, especially those in the remote suburbs that proliferated during the housing bubble, now face “a ghost town scenario”. Homes now empty will become rentals, much of the community will remain half developed, and present homeowners won't be able to sell.

“No private capital is going to take the first chances in these communities,” said Ernst. Without more government programs aimed at helping these underserved communities, their chances to recover will be remote.

The end result will be a country with deeper economic and social disparities, particularly along ethnic and racial lines. In the post crisis the world may be more balanced -- but not so the U.S.