Jon Taplin's Blog

Tough Christmas

Mastercard reports that Holiday retail spending grew 3.6% year over year. Since inflation (Y/Y) grew about 4%, that means that the long awaited pullback of the American consumer is now a reality. Since consumer spending makes up 70% of our economy, the chances of a recession during our election year increase dramatically. At the same time the Case-Schiller home price index shows a big decline for the 6th month in a row. Consumers can no longer treat their home equity as a piggy bank, since for many, their home may be worth less than what they owe the bank. As Peter Schiff points out in a NY Times op-ed this morning, home prices will have to fall by 30% to reach a market clearing price. All efforts by the government to delay this day of reckoning by freezing adjustable mortgage resets will prove fruitless.

I am always amused by my free market fundamentalist friends, who steadfastly believe that both buyers and sellers always act rationally, and so Adam Smith’s “Invisible Hand” of the marketplace always delivers the right outcome. Alan Greenspan told Fed Governor Gramlich that the Fed should not intervene to prevent shoddy practices in the Sub Prime marketplace, because mortage brokers would always rationally ”do the right thing” to protect their reputation. By the same token, home buyers would never lie about their ability to repay a trick “Ninja”  (no income, no job, no assets) loan. Fat Chance! Of course the Freemarket Fanatics like Larry Kudlow are now begging the Fed to lower interest rates and flood the market with liquidity in order to bail out the investment banks stuck with billions of toxic waste loans they have yet to disclose. So much for the invisible hand, what they want is Ben Bernake’s invisible foot on the easy money accelerator.