Thursday, January 8, 2009

Financial Reforms Being Neglected by Policy Makers Could Be More Effective Than Emergency Measures

/PRNewswire/ -- RCF, Inc. announces Housing and the Financial Crisis: Overlooked Perspectives, a study calling for more attention to financial fundamentals in combating the nation's economic woes. Time, not government measures, will be needed to work off the excesses of the housing boom. Fiscal policy has become an emergency tool of choice but is blunt and takes time. Non-punitive bank-type regulation of financial intermediaries, and measures to achieve debt transparency, could bring a quicker end to the recession.

"Fears that housing foreclosures will prolong the credit crisis are exaggerated," says Dr. George Tolley, President of RCF and co-author of the study. "Although foreclosures and subprime lending have received media attention, the untold story of the housing problems goes much deeper." The study appears in Economic Insights, a newsletter published on behalf of the Chicago Economic Observatory that analyzes current events affecting the U.S. and Chicago economies.

The study points out that foreclosures have affected less than 1% of all houses in the U.S. Alarmist discussion that mortgage indebtedness exceeds market value for up to one in six homes ignores the fact that most homeowners realize that home values are likely to recover. Many home buyers with questionable credit and speculators who counted on price appreciation are out of the market by now or soon will be.

The housing boom that ended in 2006 has left a bloated housing stock that will be a drag on growth for several years. Overly easy credit led young households to purchase homes at an earlier point in their lives. More than one million first-time home buyers own homes now who would have bought at a later time if it had not been for the housing boom.

Housing is normally one of the main shock absorbers in combating recessions, but this tool is not available for the current downturn. In the past, in combating recessions, Fed monetary policy lowered interest rates as a chief tool. Today, because of past housing excesses, we have too much housing supply and can expect little response from changes in already low interest rates.

Emphasis is shifting from monetary policy to stimulus payments, unemployment benefits, infrastructure projects and green jobs. These are less flexible than monetary policy and require more time to take effect. The moves now being proposed to stimulate the economy could actually lead to inflation as the economy recovers. Once again, attention to long-run financial reform is being neglected as a way of working ourselves out of the present problems.

The co-authors of the study are George Tolley and Ella Revzin, both at RCF Economic and Financial Consulting, Inc., a Chicago-based economic consulting firm. Tolley is also Professor Emeritus of Economics at the University of Chicago.

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