Will Obama Turn a Recession Into a Depression?

Sunday, 30 Nov 2008 07:35 PM

By Christopher Ruddy

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As our government moves to spend trillions, taking the unprecedented step of nationalizing the country’s consumer debt, it shouldn’t be lost on us that this crisis didn’t need to happen.

What could have been a mild recession isolated largely in the housing and financial sectors of the economy has morphed into a full-blown economic tsunami.

And President-elect Obama, who says he is modeling himself after Franklin Roosevelt, may follow in FDR’s exact footsteps and turn a recession into a decade-long “great depression.”

But it all didn’t have to happen this way. Really.

These so-called “bailouts” — now totaling somewhere near $2 trillion — are nothing more than wholesale transfers of nearly worthless debt paper onto the shoulders of you and me, the taxpayers.

We will be paying these bad debts off for another generation, though we never borrowed it and we never lent it. But now it’s our responsibility.

To understand our predicament, it is important to grasp what led us to this crisis. Beginning in 2001, artificially low interest rates pressed by Alan Greenspan spurred the largest asset bubble in history, known as the housing boom.

It was quite predictable that it would bust. Back in 2005, I interviewed Sir John Templeton for Newsmax’s sister publication, Financial Intelligence Report. At the time, the legendary investor told me this greatest bubble in history would burst, and home prices would fall by 50 percent or more.

He was not alone. The eminent Yale economist Robert Schiller was warning of the same housing price collapse.

In 2004, when the Federal Reserve decided to raise rates radically some 400 percent in the course of 18 months, the housing market simply imploded.

As this happened, other dominoes began falling. Mortgage paper devalued quickly. Wall Street Banks that had leveraged this paper for huge financial gains suddenly found they were sitting on mountains of nearly worthless paper.

The effort under way now for the taxpayer to assume all of this toxic paper is not a cure for the problem, just a fix of a symptom of a collapsed housing market.

We have known for the past year and a half that falling home prices are the root cause of our major current economic woes.

But policymakers have done close to nothing to solve the underlying problem. They could do so by encouraging people to buy homes, which in turn would stabilize the housing market.

Instead, policymakers at the Fed and in Washington sat by and simply watched as a cascade of economic events threatened to throw the economy back 30 years.

A cynic might suggest that their indifference forced such a monumental crisis, which has allowed Congress to take the unprecedented act of taking off all the bad debt from Wall Street, giving them cold cash for nothing, really.

When the first warning signs of the liquidity crisis hit in the summer of 2007, policymakers should have moved to take steps to get people buying homes again. Since prices had readjusted lower by then, consumers could have been encouraged to buy again.

Washington had many weapons at its disposal to make that happen. For example, it could have offered a $25,000 tax credit to anyone who bought a home (not just new home buyers).

It could have increased the deductibility of mortgage interest, say, giving taxpayers a deduction of $1.50 for every dollar on their mortgage interest.

And homeowners who sold their homes for a loss could have been given special tax considerations, perhaps additional tax credits or the ability to accelerate their losses against income.

These are just some of things that could be done.

And instead of assuming bad, old debt from banks, the federal government could have guaranteed new mortgages that banks underwrote, provided that the borrowers provided an equity down payment and followed strict criteria.

Such moves surely would have started the engine of the housing market again, stabilizing prices and putting a fire line around foreclosures.

And sensible regulations should have been put on the table.

Knowing as we do that the housing bust was propelled by adjustable rate mortgages, which were nothing more than marketing gimmicks tricking consumers into mortgages they could never afford when they readjusted, they should have been banned.

Congress also should have moved to have our banking institutions regulate the manner in which they collateralize and package debt. But none of this happened.

Instead, everyone is focused on addressing symptoms.

For example, the Democratic Congress passed a $150 billion stimulus program this year, handing out checks up to $600 to qualified taxpayers. It didn’t work.

Instead, Congress should have been lowering taxes across the board, giving new incentives to investors to place capital in small business, and cutting corporate taxes. Such moves would have stimulated business activity far more than direct cash distributions to lower-income Americans. No doubt, many spent their money on gasoline and at Wal-Mart, effectively sending the proceeds directly to OPEC and China.

As for Obama’s “change” program, he is talking about even more “stimulus” — spending as much as $700 billion. Like FDR, Obama says he will increase employment with massive public works projects, creating as many as 2.5 million jobs.

But such projects never cured the Great Depression. In fact, there is a strong argument that such moves lengthened the Depression by keeping precious economic resources in the public sector, instead of pushing them through the private sector to increase overall economic growth.

Join Christopher Ruddy on a Special Cruise! Newsmax will be hosting its 10th Anniversary Cruise in June of 2009 and you are invited! Join Newsmax writers Dick Morris, Ronald Kessler, Christopher Ruddy, Dr. Russell Blaylock, Dr. David Brownstein, and many others on an incredible cruise of the Mediterranean. For full info — Click Here Now.

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