The U.S. economy is caught in a web — of artificially low interest rates, easy money, fiscal “stimulus”, and expansive government control over whole sectors of the economy. And government has no intention of changing course.
The ostensible purpose of turning the money spigot on at full force in 2008 was to create a soft landing for the economy. Particularly, policymakers appeared desperate to keep deflationary forces at bay in the housing market, and to prevent prices from crashing rapidly. At best, they claimed to be saving the nation from another depression.
Unfortunately, housing prices have declined anyway by about one-third from their 2006 peaks, resulting in some $800 billion of negative equity for homeowners. Making matters worse, they may fall another 20 percent should the economy remain weak.
The home price declines were as inevitable as the housing bubble was avoidable. As you will recall, loose underwriting standards, low down payments, and low interest rates — all induced by government policies — led to the bubble’s rise. When it popped, as all bubbles do, the only question posed in 2008 was how quickly prices should be allowed to fall.
Regrettably, all the easing, spending, bailouts, and government takeovers have done is to prevent the market from finding its natural bottom. The Federal Reserve has kept its benchmark interest rate at near-zero percent since December 2008. This has only prolonged the economic misery, as the path to the bottom has slowed, creating a deflationary trap. The bottom has still not been reached.
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