February 2008 – The Answer To The Question

The answer to the question “How did the US get into the present housing crisis” goes back to a real estate class examination question I missed in 1964.  While I was a student at the University of Florida studying real estate, I could not answer an exam question, which I remember to this day.  The question was, discuss the meaning of the phrase, ” Housing is the handmaiden of the GDP”.  At the time I knew “GDP” stood for the gross domestic  product or the amount of goods and services produced in a country over a given time period.  I had no idea what was meant by the term “handmaiden”.  The answer is that housing activity can bring the economy or GDP up and housing can bring the economy down.  Because housing is labor intensive, it consumes domestic products and can be rapidly built, it will quickly move the economy.

Now let’s go back to the year 2000, the tech bubble is bursting and you are Alan Greenspan in charge of the economy.  If he paid attention in my real estate class he would remember that “Housing is the handmaiden of the GDP” and to stimulate the economy he would pour money into housing by making mortgage money available on very liberal terms.  Looking back this is exactly what happened.

Fast forward to 2008, the housing bubble that this created is about to burst like the tech bubble did in 2000.  But now there is a problem, the old formula of using housing to stimulate the economy will not work.  We already have an excess supply of housing, which is too expensive for most buyers.

One way to stimulate the economy is to increase manufacturing and with the decline in the value of the dollar, more products are being exported.  But with higher productivity, fewer workers are needed to produce more goods.  What to do, what to do?

I believe that in order to stimulate the economy the government will create a “Works” program to build and rebuild our roads, bridges, transportation systems and yes even stimulate alternative energy development.  Everyone uses these public facilities, the money is being spent locally and we cannot continue down the path of continued oil use.

In the meantime, prepare for a period of declining employment, declining sales and difficulty in borrowing money, and inflationary pressure brought on by government spending on public works projects.  Hopefully, there will not be created the “stagflation” of President Carter’s administration when the economy was stagnant, but inflationary pressure ran wild.  If the administration is successful this will be just another economic cycle of ups and downs which seems to occur every ten years and should be over by 2010.