Since the recovery began, the economy has grown at a rate of less than 3%. That is faster than its long-term potential, of about 2.5%, but America has woken from past deep recessions at rates of 6-8%. Job creation has thus been too feeble to bring down the unemployment rate, which at 9.6% is much as it was at the start of the recovery. “Progress has been painfully slow,” acknowledged Barack Obama on September 8th—not what a president likes saying less than two months before an election.
America could hasten deleveraging and improve workers’ ability to move to new jobs by being more eager to cut the principal on mortgages to sums closer to homes’ actual values. That would often both be cheaper for lenders than foreclosure and let owners keep their homes. But cuts in principal have been rare—applied to a mere 120 of the 120,000 mortgages permanently modified through the federal government’s programme between October 2009 and March 2010. Banks don’t want to let borrowers who can really pay off the hook, to give others an incentive to default, or to recognise more losses.
Cleaning up the housing market would help cut America’s unemployment rate, by making it easier for people to move to where jobs are. But more must be done to stop high joblessness becoming entrenched. Payroll-tax cuts and credits to reduce the cost of hiring would help. (The health-care reform, alas, does the opposite, at least for small businesses.) Politicians will also have to think harder about training schemes, because some workers lack the skills that new jobs require.
Americans are used to great distances. The sooner they, and their politicians, accept that the road to recovery will be a long one, the faster they will get there.
Bankruptcy laws could be changed to allow courts to reduce principal, much as they can for the debt of a company in Chapter 11. John Geanakoplos of Yale University has argued for special federal trustees, empowered to insist on modifying or foreclosing impaired loans. They would choose the course giving the lender the highest return.
However, forcing banks to recognise losses would erode their capital. Some could raise more if they needed it, but others might fold. Since the TARP was wound down, the federal government has no money for buying the loans or recapitalising banks—and there is no political appetite for doing so. Indeed, arguably the opposite is happening as Fannie Mae and Freddie Mac, the two nationalised mortgage agencies, seek to compel banks to buy back loans of doubtful quality they had sold to the agencies.
This article is a partial reprint from The Economist.
