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.
Since the crisis broke out three years ago, Mr. Obama and Treasury Secretary Timothy F. Geithner have attempted to influence events in Europe behind the scenes, pushing for measures to prop up growth on the Continent to prevent a worsening recession. But their advice has been mostly ignored by the de facto leader of Europe during the crisis, German Chancellor Angela Merkel. Like many U.S. Republicans, German leaders view the administration's prescription of loose fiscal policies tied to even looser monetary policies as bad government management.
Austerity snuffs out growth
Germany and its allies in Northern Europe instead have prescribed stiff budget austerity for their ailing Southern European neighbors. When combined with the grudgingly accommodative monetary policy of the European Central Bank, the budget cuts have thrown Europe into a double-dip recession, as U.S. leaders feared, leaving them to powerlessly wring their hands.
Mr. Romney's silence on Europe suggests that he has little to offer that would differ from the Obama administration other than to start imposing budget austerity in the U.S. like that seen in Europe. But even if he wanted the U.S. to take a more active role in addressing the crisis in Europe, his own party in Congress most likely would block him. Conservative Republicans in Congress view the limited, noninterventionist approach of the Obama administration, which has been influencing events indirectly through its veto power at the International Monetary Fund, as going too far.
Conscious of opposition in Congress, the U.S. Treasury was conspicuously absent when the IMF this year announced additional contributions of $400 billion from nations outside Europe to help address the crisis. Even so, some prominent conservatives in Congress want the U.S. to pull what little assistance it is providing to the IMF through previously negotiated credit lines to prevent the money from being used to bail out profligate borrowers such as Greece.
While the parties bicker over what to do about Europe, David Greenlaw, a Morgan Stanley economist who recently received a prize for accurately forecasting the deep recession that followed the 2008 financial crisis, said he expects "spillover" from the European crisis to be an impediment to growth next year, no matter who is in the Oval Office.
The economy in 2013 will be "quite sluggish" because of such outside problems, he said, although he expects the housing recovery to pick up and be a "bright spot" in an otherwise drab recovery.
Housing faces big hurdles
Billionaire investor Warren Buffett also said Wednesday that he expects the housing and economic recovery to continue next year no matter who wins the White House. But others are not so sure that the housing market will be able to overcome the lingering obstacles from a still-retrenching mortgage market.
"You've got the Fed delivering the best housing recovery medicine possible — record-low interest rates," said David H. Stevens, president of the Mortgage Bankers Association. "Yet, credit policy is so tight those rates are being neutralized."
He blames the "undue underwriting caution" of banks on a combination of tighter credit standards by the federal housing agencies, confusing federal mortgage regulations, "aggressive" moves by Fannie and Freddie to hold banks accountable for losses on risky or undocumented loans, and "false claims" and costly litigation against banks from states, citizens groups and other quarters.
The Fed's unprecedented program to purchase mortgage bonds and drive interest rates lower is "being blunted by restrictive credit conditions when it should be fueling a booming recovery," Mr. Stevens said.
Housing's problems will not be solved easily, said R.C. Whalen, a housing-finance specialist at Institutional Risk Analysts.
"The supply of qualified individuals with the capacity to buy and actually occupy a home has fallen dramatically" since the crisis, because banks today are refusing to extend credit to about 30 percent of borrowers who qualified for loans during the housing boom, he said. "How do you fund a housing recovery" when the pool of buyers is shrinking? he asked.
"The headwinds affecting the economy and the housing market are simply too strong" to allow vigorous growth, no matter who wins the election, he said.
"A victory for President Obama probably means a flat-to-down economy and housing market in 2013 and beyond. A victory for Mitt Romney and the Republicans may help job growth and the housing sector on the margins, but only after 2013 and even then not significantly."
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