Economic historian Peter L. Bernstein writes in the Sunday New York Times about the need for housing prices to turn around before the rest of the economy can:
Nevertheless, the therapy must focus on the household sector, wrestling with the triple blows of high home prices, oil prices and food prices. Nothing will turn the economy around until we can restore some sense of hope and security among consumers — perhaps even as food and oil remain painfully expensive.
Today, a halt in the decline of home prices seems the necessary condition to transform the system from despair to hope and to turn the financial sector, now embattled and disorganized, back into the functioning organism the economy needs so badly. Indeed, here is where economic policy can have some influence on the outcome. (In the case of food and oil, the forces are too strong for government to intervene with any success.)
Mr. Bernstein goes on to paint the federal government as the white knight in this saga, with the responsibility to save more homeowners from foreclosure and to therefore buoy investor confidence and save society as we know it.
The economy teeters on the edge of not just a recession, but also a more profound decline where trouble in any single sector can spread breakdowns throughout the system, driving unemployment to intolerable levels. To sit back and let nature take its course is to risk the end of a civil society.
Until we move more decisively in this direction, other efforts are likely to be frustrating at best and counterproductive at worst. The household is the key to the puzzle.
