The election is all about the economy this year, but neither presidential candidate has talked much about two major problems that could make or break the economic recovery in the next presidential term: housing and its broken finance system, and the European debt crisis.
The housing market has been the biggest drag on the economy since its historic collapse in 2007 sent the economy into a deep recession. While the market is struggling to stage a recovery this year, all sides agree that the biggest obstacle to improvement is Congress‘ failure to lay out clear rules and a new structure for reviving the dysfunctional mortgage market, which remains almost entirely dependent on government support. Banks remain reluctant to lend because of their huge losses during the financial crisis, and they provide loans only to people with the best credit or government backing. This reluctance undermines the housing recovery despite the record affordability of homes and an unprecedented drop in interest rates engineered by the Federal Reserve.
Many people are eager to buy homes at today’s low prices and mortgage rates, but the little credit being meted out by the banks must meet the approval of the insolvent mortgage guarantee giants Fannie Mae and Freddie Mac, along with the federal insurer, the Federal Housing Administration, all of which have tightened their credit standards to prevent further losses to taxpayers.
Republicans and Democrats say they want to phase out reliance on the government giants and revive the private mortgage market, but neither presidential candidate has outlined a plan to do that. Without a clear path to revive the vital financing markets, housing has been able to proceed only at a glacial pace. Its fragile recovery remains in danger, and it could quickly revert to being a burden if the economy experiences further stress.
“Neither side has made much progress on solving what role the government should play in financing mortgages,” said Daniel Indiviglio, an analyst with Breakingviews.com. “Fannie Mae and Freddie Mac have been a failure, costing taxpayers almost $190 billion to keep afloat. Yet they still prop up the mortgage market.”
Options that the Obama administration offered last year for either phasing out Fannie and Freddie or turning them into stripped-down government mortgage utilities “lie dormant” in Congress, he said, with neither the Republican-led House nor the Democrat-led Senate able to agree on what to do. Republican presidential candidate Mitt Romney has given no clue as to how he would propose to break the impasse, although he has called for “smarter regulation” to free up more credit for buying houses.
European crisis simmers
Meanwhile, the European debt crisis continues to percolate, holding down economic growth as sales to the biggest U.S. export market falter and the recession in Europe tugs at growth in emerging economies such as China, which has been the fast-growing market for U.S. exports. Exports had been one of the strongest sources of growth for the U.S. economy until Europe sank back into recession this year.
Many politicians and voters view the European problems as background noise, but economists say a worsening recession or major collapse of the European monetary system remains a threat that would pose an even bigger danger to growth in the U.S.
Europe’s woes have been weighing on the stock market this week as U.S. corporations cite reduced sales in Europe in reporting lower earnings. Ford Motor Co. said it is losing $1 billion a year in Europe and will close a Belgium manufacturing plant.
Both major presidential candidates are largely ignoring the European mess while campaigning, at least in part because there is little the U.S. can do to help resolve it. If European efforts go off track, however, the long-running crisis could have a major impact on the next presidency.
The most prominent mentions the European problem gets in the campaign have been Mr. Romney’s occasional reference in debates to the economic implosion of Greece and Spain as a cautionary tale of what could happen to the United States if it doesn’t gain control of its own mounting debts.
“When it comes to the economy, many of the basic reasons for our sluggish recovery and the ideas needed to address it have been missing from the debate,” said Sherle R. Schwenninger, an analyst at the New America Foundation. “Except for the usual election-year pledges to get tough with China on trade, expand American exports and fix the tax code in order to encourage more investment at home, the two candidates have been silent on the world economy, as if there were no eurozone crisis,” economic slowdown in China or other pressing global economic matters.
Both candidates “seem to make some very questionable assumptions that the crisis in Europe will be overcome through continued austerity and ad hoc management led by the European Central Bank,” though signs are that the budget austerity taking hold in Europe is only worsening the severe recessions in Spain, Greece and other hard-hit states, he said.
“If this is plan A, then we urgently need to ask the candidates what their plan B is,” Mr. Schwenninger said. Yet not a single question was raised about the European crisis in a debate between Mr. Romney and President Obama this week devoted to foreign policy.