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Here Comes a Recovery—Maybe

12:00 AM, Mar 3, 2012 • By IRWIN M. STELZER
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Then there is the housing market. Some experts are guessing that it has hit bottom, ending the fall that has been a drag on the economy. But many potential buyers can’t meet new stringent mortgage loan requirements; others are holding off because they fear prices have yet to stabilize; repossessed homes continue to glut the lower end of the market, and things will get worse when technical legal objections to default are solved. Worst of all for household balance sheets, house prices ended 2011 at their lowest level since 2003. “Problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence,” Bernanke told his congressional interlocutors. That’s one reason the Fed chairman sticks to his forecast of unspectacular growth this year and next.

Finally, Obama might get tripped up by developments in the bond market. Investors see the dollar as a safe haven, and are willing to lend America the huge sums we need to borrow despite receiving very low interest rates on their loans. That might not last. China has already signaled its increasing reluctance to add to its dollar holdings and, despite eurozone problems, its intention to invest more in Europe. Only 15 percent of the recent increase in China’s foreign reserves went to the purchase of U.S. securities, down from 45 percent in 2010. And the rating agencies might lose patience with our political stalemate. If interest rates rise, we will have to pay more to borrow to fund our Grecian-level deficits, and low mortgage rates that have prevented a complete collapse of the housing market will be a fond memory. Obama would find it difficult to defend his borrow-and-spend policy in the face of the inevitable economic slow-down.

With over 60 percent of Americans telling Gallup pollsters that the economy and jobs are their top concerns, voters will agree with Bernanke that “It will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.” Democrats will spin incoming data to support their argument that thanks to the president things are getting much better. Republicans will spin those same data to prove that America is in bad shape and getting worse. The truth so far lies between much better and worse.   

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