Bottom of the Housing Bust Nowhere in Sight, Economists Say

WASHINGTON, NOVEMBER 12, 2008--With stock and house prices falling and Congress considering a new fiscal stimulus package and exploring additional bailouts, is an end to the financial turmoil in sight? At an AEI event on October 30, a panel of experts offered their opinions on the current state of the housing crisis and speculated about when the housing market.will finally bottom out. The consensus? It will be a while yet.

Falling economic indicators and the continued slowdown in the housing and credit markets, both in the United States and abroad, have given the panelists reason to believe that the nadir of the housing crisis is still to come. Predictions of when markets would reach their bottom varied from third quarter 2009 to sometime in 2010. New York University economist Nouriel Roubini said that "for the last few months, people have always been calling the bottom. . . . They said it after Bear Stearns, after Fannie and Freddie, after AIG, after TARP [the Troubled Assets Relief Program] . . . and each time markets have rallied for a little bit and then gone further south. . . . Unfortunately, I don't think we're at the bottom."

The panelists agreed that intervention in the housing market is necessary to address the downward spiral. Thomas Zimmerman of UBS Investment Bank spoke for other panelists when he said that "if you want to stop another year of really terrible pressure on the housing market, you have to intervene some way."

AEI resident fellow Desmond Lachman noted that "stabilizing the housing market is a necessary condition for stabilizing the economy." He emphasized that improving the health of the housing market should be the first priority of the government, because the broader economy and financial markets cannot begin to heal until the underlying housing deflation is resolved.

John H. Makin, a visiting scholar at AEI, said that the housing market should not be the government's sole focus; the Federal Reserve must also be vigilant against the threat of deflation. Since the demand for cash explodes in a panic, he suggested that the Fed start printing money to keep the money supply high, rather than letting it fall as it did during the Great Depression. "The way you deal with [the threat of deflation]," Makin said, "is that the central bank comes out and says, ‘All right, we will print more money to buy equity. We'll print money to buy long term bonds. We'll print money to buy anything, and we promise you folks that the price level next year will be higher than it is now. We promise you inflation.' When the central bank gets around to promising inflation, we will begin to move out of this crisis." Roubini agreed with Makin that monetary policy is a primary concern, and he suggested that the biggest economic story six months from now will be deflation.

R. Christopher Whalen of Institutional Risk Analytics noted that if the panel's projections prove correct, many of the major banks will need further capital injections in the next year and could fall under government control. The panelists agreed that effective government intervention is required to address the market's panicked flight from credit to cash and Treasury or Federal Reserve obligations.

--CHAD HILL

For video, audio, and event information, visit www.aei.org/event1813/. See also the first, second, and third installments in this conference series.

For AEI scholars' work on the financial crisis, visit www.aei.org/financialcrisis/.

For media inquiries, contact Veronique Rodman at 202.862.4870 or vrodman@aei.org.

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