A new light on housing's role in economic recessions

While the President today offered up fixes for some of the foreclosure problems resulting from the collapse in subprime mortgage lending, a UCLA professor took a deeper look at housing's role in the nation's economy and recessions.

Edward Leamer, a professor with UCLA Anderson School of Management presented his paper, "Housing and the Business Cycle" at the Federal Reserve Bank of Kansas City's annual Economic Symposium this morning in Jackson Hole, Wyo.

Leamer, who also serves as director of the well known UCLA Anderson Forecast, gives a starkly different view of housing's role in economic recessions. While many economists would say the economy is guided by business cycles, Leamer argues that the economy is guided by a consumer cycle that's driven especially by the ups and downs of housing.

He also argues that the Fed's opposing view of housing's role and its handling of interest rate cuts layed the foundation for today's problems.

"By neglecting the critical role that housing plays in U.S. recessions, our Federal Reserve has let our recessions be more frequent and more severe then they need to be," said Leamer. "In particular, the subprime mortgage crisis is a direct consequence of short-term interest rates held too low for too long by the Fed."

Leamer examines statistics back to World War II to highlight how weaknesses in housing and consumer durables make significant contributions to economic recessions.

More from his paper: "The historical record strongly suggests that in 2003 and 2004 we poured the foundation for a recession in 2007 or 2008 led by a collapse in housing we are currently experiencing. Only twice have we had this kind of housing collapse without a recession, in 1951 and in 1967, and both times the Department of Defense came to the rescue, because of the Korean War and the Vietnam War. We don't want that kind of rescue this time, do we?"

Some in the housing and financial industries are hoping the Fed will respond to current problems by lowering the federal funds rate, which can trigger lower borrowing rates for home buyers and stimulate housing activity. Leamer, however, concludes his paper by asking the Fed to do more.

Leamer would like to see the Fed:

--Smooth the business cycle.
--Keep us working productively.
--Limit the redistribution of wealth caused by financial market disruptions.
--Keep our balance sheets accurately reflecting reality.

Click here to read Leamer's full 73-page report.

And in case you missed the Bush Administration's first steps today -- catch up at this link, "Bush promises help for homeowners, but not lenders."

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