The “official” dates of the U.S. financial crisis were 2007-08. Since then, we’ve had a few additional crises, in particular, the Euro crisis. But overall, the global financial crisis seems to have been contained.
But I’m not so sure. Contained it might be, but the effects are long-lived.
For example, the Federal Reserve often discusses weakness in the labor markets, particularly as the Fed Chairwoman Janet Yellen is a prominent labor economist. And the federal officials often discuss weaknesses in housing markets.
In January 2009, the Fed began an aggressive policy of loading the economy with easy money – quantitative easing – and continues to do so. The largest European economies and Japan followed suit, more or less, later that year. But less aggressively.
And yet, the U.S. economy is still about 4 percent below where it should or could be.
Herein lies the heart of the ongoing crisis. The Fed has done all it can to pump up the economy. The Fed’s balance sheet has gone wild and has been since the early days of the crisis.
For example, the Fed currently owns about $1.5 trillion worth of mortgage backed securities. During normal times, the Fed holds about $0 worth.
And with all the cash out there, about $2.8 trillion, some are concerned about rampant inflation. However, markets aren’t concerned. Nor does the data suggest cause for alarm. In fact, data show deflations more of a concern.
This gives the Fed some wiggle room.
Which leads us back to the labor market. Unemployment is down, but other prosaic statistics remain uninspiring. The employment-to-population ratio has been stuck at 58 percent since 2009. Before the crisis, it was 63 percent.
Housing remains anemic – this scares the federal government. New regulations put in place after the most recent housing bubble burst to prevent a three-peat are being relaxed.
It’s déjà vu all over again.
All the while, banks are having to dot every ‘i’ and cross every ‘t’ on regulations that may or may not be useful.
The result is a slowing housing market that has stagnated since the end of 2012.
For better or worse, I tend to think a little worse, the U.S. economy has become overly dependent on real estate markets as an engine for growth.
But it does so for a couple of reasons. First, is the obvious impact on the real economy. You need wood, plaster, bricks, microwave ovens, etc. to make a house. There is a direct impact.
Second, gains in real estate prices increase wealth and spur consumption via the “wealth effect.”
But neither of these comes without a cost. Investing resources in housing means other sectors are losing out.
Wealth effects could be driven by speculation – just ask a Los Angeleno. But speculative gains could just as easily, and quickly, turn to losses.
So, the standard relationship between financial markets and the real economy seems to have been severed. Crisis noninterruptus.
sonora_t@fortlewis.edu. Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.
