Economic Nonsense: How the Obama Administration is Prolonging the Recession

President Obama's economic team is jumping ship as it becomes clearer each day that the administration has botched attempts to recharge the flagging economy. The latest rat leaving the sinking ship of state is top economic adviser Larry Summers, who is better suited for academia than the rough-and-tumble world of politics. His departure hopefully is not the end of the housecleaning. Treasury Secretary Tim (Tax Cheat) Geitner needs to walk the plank, too.

Even the most ardent Obama supporter cannot defend the administration's spectacular failures in the economy arena. Despite spending trillions in bailouts and economic stimulus programs, unemployment has not budged. In fact, it has gone from 7.7 percent when the President assumed office to nearly 10 percent. Consumer spending has all but dried up as people prop up their savings and pay down credit card debt.

This economic reality has escaped the attention of the Obama Administration, whose only solution is to keep driving the country deeper into debt with frivolous government programs that do not address the real economic issue. In fact, this scribe is convinced the administration and its army of economic lightweights don't have a clue about what is the problem. Obama and his sycophants in the media believe it is about jobs. But joblessness is only the symptom of the larger problem.

For months, your faithful journalist has been pointing out that it is all about real estate prices, foreclosures and underwater mortgages. This recession was the byproduct of a real estate bubble that burst, sending ripples through the financial system. Liberals like to argue that it was all Wall Street's fault because the financial firms sold risky derivatives based on underlying housing mortgages. But, what they fail to acknowledge is that if the mortgages had been sound, then the derivatives would have paid off handsomely. Everyone would have won.

Fingering the derivatives is like blaming the sneeze for your cold. Outlandishly lax lending practices, championed by Freddie Mac and Fannie Mae, led to unhealthy homeowner speculation and saddled under qualified buyers with mortgages they couldn't afford. That is what drove the real estate market off the cliff and sunk the derivatives, leaving homeowners, banks and financial firms in dire financial straits. That shouldn't be too hard to understand, especially for anyone with an ounce of economic acumen.

Yet Obama's so-called economic dream team has spent precious few dollars and efforts on addressing this problem. Instead, they have bailed out billion-dollar banks, papered over financial loses at big Wall Street firms and doled out nearly a trillion dollars for wasteful programs designed to reward Democrats up for reelection under the guise of economic stimulus.

Until the administration addresses the real estate issue, the economy will continue to slumber. Here's why: For most consumers, their home is their biggest asset. When the price of this asset goes down, they rein in spending. They don't feel as "rich" when their home's market value dives 10 to 25 percent, as real estate prices have done in the past two years. When values fall, homeowners who might have been considering moving, put off plans for fear they won't be able to sell their domicile. Or if they do sell, they will have to take a bath, leaving them too little profit to put down on a new home.

There are broader ramifications for the economy. Many homeowners have mortgages that are underwater. That means they owe more on their home than the asset is worth. When this happens, consumers are less likely to spend money renovating their homes or buying new furniture or appliances. Their spending on big ticket items evaporates.

In addition, a depressed housing sector costs jobs. Construction workers, realtors, home builders, suppliers and others have been forced to lay off people. In some cases, industry firms have shuttered their businesses. Housing is a huge employer and when construction falls, there is an aftershock through the entire economy.

Until the Obama administration fixes housing, the economy will remain stalled. No amount of money thrown at big banks, small businesses, stimulus, job retraining and jobless benefits will change that. It is merely dumping taxpayer money down the drain without moving the economic needle.

So what needs to be done? Here are a few modest proposals for reversing the housing crisis and shock the economy into recovery:

ADDRESS UNDERWATER MORTGAGES: This should should have been the very first initiative of the Obama Administration when it assumed office. When home prices fell, lenders began demanding higher payments when mortgages dipped underwater. This sent many homeowners running for the cover of bankruptcy or drove them into foreclosure. The government could have given incentives for lenders to hold the line on payments by relaxing requirements on capital to shore up bank balance sheets. Then the feds should have required (not suggested) lenders to restructure the loans at prevailing interest rates, eliminating adjustable rates mortgages, which have been the scourge of the real estate recovery. If this had been done early on, not only would have more owners been able to remain in their homes, but the market would not have been flooded with foreclosed homes which in turn crippled home prices even further.

INCENTIVES FOR HOME BUYERS: The administration's lone attempt to boost home sales was to launch a program to reward buyers with tax credits. Under the plan, first-time homebuyers received an $8,000 tax credit, while repeat purchasers got $6,500. The program ends September 30, but sales contracts had to be signed by April 30 to qualify. Sales figures were impressive during the short-lived effort, but never reversed the housing slide. The program was too late to turn the tide and was too short in duration. Most realtors also will tell you that the administration's program suffered from paperwork logjams, delays in approvals and government blunders that forced some home buyers to make multiple applications. Many frustrated home buyers simply gave up. Instead of tax credits, the government could sweetened the deal by refunding the money directly to homebuyers upon completion of the sale. Tax credits are "soft" money because in many cases it probably will only reduce income taxes for the buyer. There is no guarantee of a tax refund which would put money in the pockets of buyers. Cash always works better than credits when it comes to buyer motivation.

STRENGTHEN EXISTING HOME SALES: When the housing market collapsed, the market was saturated with existing stock that was not moving. There were too few buyers and too many homes for sale. This is what tanked housing prices. As foreclosures mounted, that exacerbated the problem, causing the supply of homes to far outstrip demand. In this environment, prices plummeted. It's the law of real estate. The administration should have zeroed in on this issue by undertaking efforts to help reduce the supply. In addition to the refund idea mentioned above, the government should have funded a program to waive closing costs on existing homes. Under this plan, the government would send money directly to lenders to cover the costs.

SUBSIDIES TO BUILDERS: The final linchpin in this housing program should have included direct subsidies to home builders. The money would be used to reduce new home prices, while encouraging builders to continue construction. Lower home prices would have attracted buyers, which would have helped deplete the existing inventory of new homes on the market. As new home sales increased, fewer workers would have been laid off and construction would have continued, albeit at a reduced rate.

Like me, you probably are wondering what all of this would have cost the taxpayer. Whatever the price tag, I guarantee it would be far less than what the Obama economic gang has dumped into the stimulus boondoggle, car company and bank bailouts and a host of other programs. Liberals would tell you helping homeowners would not have solved the banking mess or halted the job losses. They are dead wrong.

Liberals don't understand the American economy. It is 75 percent driven by consumer spending. When consumers shut their wallets, no amount of economic pump priming will dig the economy out of its hole. The current problem is even consumers with jobs aren't spending. They look at their devalued homes and tighten their belts another notch. Sure, they are worried about their jobs too. But once consumers start spending, big companies will prosper, small businesses will rally, Wall Street will boom, new capital will flow into the market and the American enterprise system will grow.

However, don't hold your breath waiting for this to happen. The current administration, led by clueless academic classroom economists, are misguided and ill equipped to deal with the realities of our economic malaise. Only a change in administrations will brighten the outlook for economic recovery.