When I majored in Economics the discipline was quite a bit different…and not. It makes me recall the old saying; everything is different…nothing has changed. Back then, we were on the waning cusp of the Keynesian Revolution, and the Monetarists, led by (the later Nobel Lauriat) Milton Friedman were happily waxing. The theories were different than what we see today, but the fundamental approach has remained unchanged. That lack of change continues to be the bane of most economists, politicians, and financial soothsayers of every description.
After 35 years since graduation, and even with my attempts to remain well-read, I would probably be challenged to get a respectable grade in an Econ 101 course. Nevertheless, the fundamental I took from my education remains fresh and, I believe, timeless. It is this simple fact: Economics is a behavioral science, not an exact science. That fact would not receive much debate in academic circles, yet the practical application of it seems to be lost in the practical application of economics in the real world.
The unchanging part of formal Economics is the insatiable desire to apply formula to human behavior. Our politicians are currently struggling to do just that and with resources (in the form of debt) that have no precedent (that I can think of), certainly on a scale never before imagined. Our leaders, including Obama, are tapping into their favorite economists to give them direction, probably based on what economists are currently in favor. Yet economists are like stabled horses; you check out their papers, look at their teeth, examine their gate, admire their confidence, but when you get on to ride you can’t be sure what’s going to happen. In all likelihood the economists or economic theorists chosen are the ones with the latest successes, but those successes might have been on a dry track and perhaps now the raceway is inches deep in mud. That may explain why I occasionally hear that some politicians (and academics) want to saddle up Maynard Keynes again to see if he’s good for another spirited ride.
I do believe that certain economic assumptions have value if they are consistent with the understanding that human behavior is inherently inconsistent (or erratic, to be less gentile) and it begs for the application of common sense. Human behavior, economic behavior included, reacts to two opposing stimuli: risk and certainty (more accurately predictability since certainty doesn’t exist except perhaps in natural science). In the real world, individuals (of varying numbers) get rich in an environment of risk, but societies economically flourish in an environment of predictability. What the Bush and (it appears) the Obama administrations are trying to do is create growth by heaving great loads of cash into the system, which Monetarist theories tell them will accelerate the economy. Several other nations are doing the same. What they fail to understand is that these attempts very likely will have no effect on growth since they don’t address the major underlying problem: the perceived lack of predictability by the people who comprise the Economy.
Take what most people, including me, feel is the major stumbling block to economic stability: the housing market.
Why the housing market as opposed to say, the job market (another good choice)? Housing is, I believe, one of the great fundamentals of human behavioral stability, along with food and safety. More importantly we have matured as a specie to think of the stability of our habitat as a precursor to much of the rest of our decision making (maybe we always did – leave that to the anthropologists). Of course this doesn’t include all people, but certainly a vast majority enough to drive economies. As we have come to rely on the certainty of our dwellings, and more over the value of those dwellings, we are freed to approach many other economic adventures with a sense of predictability. Now many are uncertain of the viability of remaining in their homes and most everyone feels uncertain as to the value, present and future. Restoring predictability to the housing market is what is needed, not attempting to restore value, or keep people in homes they never should have owned in the first place.
If I had the opportunity to lobby Mr. Obama, I would push him in the one direction everyone seems to be running from; underwriting prospective homebuyers who do not qualify under our current standards. Basically, go back to what many think got us (and the financial markets) into this problem in the first place, sub-prime lending. However, I would trim the fat in three ways; it would be publically funded (eliminating the greed that drove that last perfect storm), direct it only to buyers who do not currently own a home, and not eliminate the income or equity (appraisal) portion of the mortgage qualification.
The underwriting would be to lower the threshold on credit score. This would all be geared to starting the domino effect that has always been part of the modern real estate housing market, the movement of individuals from one home to another. Many renting individuals who may have defaulted on a sub-prime mortgage due to the size of the mortgage relative to the value of their home (a home they should never have been in) would be able to get the opportunity for finance to a smaller home, provided their income supports it. Just the smell of inflation in the housing market, however slight, due to movement of homeowners, would help jumpstart the entire process.
It’s impossible to predict what level housing values may evolve to in such a process or even how long it would take. However, I’m comfortable with one forecast: once the housing market has achieve a level of predictability where individuals can feel comfortable about what their home is worth and that the opportunity to leave that home or stay in it is a matter of simple choice and not necessity, then the rest of our economy (in the absence of catastrophe or conflict) will begin to show its own renewed sense of predictability and growth. The economists will rewrite their new formulas and we’ll just get on with the next crisis. I’m concerned, nonetheless, that if our leaders, especially Obama and his advisors, continue to widen this tsunami of debt in the attempt to buy confidence, then we will be left with simply a widened crisis…and some very, very rich people.
