Opportunity for political change in US housing crash? Maybe, by gimleteye

So you want to be the next president of the United States?

The defining issue of the 2008 election, not yet manifest, is a severe recession caused by excesses in housing markets.

The next president of the United States will be the candidate who captures the public imagination on specific and concrete measures to correct the US economy by reforming our energy and economic future.

There is one reason, and one word, why this recession will be different from any other that the US has experienced in modern times: China.

In the flattened world economy, there’s a big difference between the Chinese and us: we are massively in debt.

In the past, manufacturing could be expected to pull us from recession especially when a cheap dollar could stimulate export of US goods.

But we really only manufacture two product areas for export anymore in noticeable volume: commercial aircraft and military hardware. China and other low cost labor nations make the rest.

Growth of multinational corporations in the US have used the spending capacity and willingness of US consumers to incur debt in order to increase geographic distribution of revenues. The domestic US manufacturing sector cannot come to the rescue of this recession because it has been so badly weakened.

Inexpensive goods manufactured in China have allowed the US economy to maintain the illusion that service sectors of the economy, like finance and health care, and industries related to real estate can indefinitely carry our fortunes. That's ending, fast.

During the decades when China was massively expanding, the US economy thrived on productivity gains and, above all else, the willingness of the American consumer to borrow more and more.

Today, there is increasing awareness that the world-wide credit crisis costing financial institutions hundreds of billions in losses was triggered by the willingness of US government regulators and Congress to be cheerleaders for the expansion of the housing boom beyond any measure of fiscal prudence.

Even today, realtors and home building spokespersons are referring to the Bush “ownership society” as an unqualified good to the economy and nation. Wrong. It was a Ponzi scheme for which no financial interests will ever be held liable.

For as many hundreds of millions the top echelon of Wall Street and corporate America have taken down in compensation, they still cannot do anything, based on past models, to revive the US economy.

There is nothing the Federal Reserve or federal government can do, either, to rescue shell-shocked consumers whose homes, used as ATM’s for personal consumption through home equity lines of credit, are worth considerably less than they believed in 2005.

The debate on what comes next is long overdue. The way forward is clear enough.

First of all, the urgent case to change our energy future provides massive opportunities for profit in new, green technology and industries. There is no news in this, still there is little leadership from the White House or Congress for dramatic regulatory action to inhibit the old line industries that depend on fossil fuel production, distribution, and consumption.

We have never, in US history, faced the mandate for reforming our economy with such urgency as today.

A stiff recession will provide will finally provide the reason for the US economy to transform: but we will need political leadership to seize the moment.

One of the unique aspects of the climate change imperative is that incremental change is not a viable option. The “conservation is a personal virtue” mantra of Dick Cheney is as outdated as bustles and hoop skirts.

Still, for eight years the White House and Republican leadership in Congress has pummeled the American public with a non-stop diet of fear and obfuscation. The effect is to reinforce the status quo. And old line, fossil fuel industries are fighting continuous, rear-guard actions to preserve their prerogatives.

The second part is more difficult to convey: how the worst tendencies of Wall Street and the so-called “free” market need to be creatively and forcefully regulated, channeling the energy of credit markets toward reforming the US economy.

The recession, and our dependence on China, is reinforced by personal consumption according to rules of what Wall Street can most profitably finance.

The prime exhibit A is the massive role of financial derivatives in our economy, and in particular, as they provided fuel for the housing boom and bust.

The average citizen is clueless about the proliferation of debt and the creative strategies that allowed new leverage to be created out of simple home mortgages.

Because the level of public understanding is so low, Congress has been fretting in the dark how to deal with the crisis, afraid of offending key constituents in the financial sector.

As one bean counter after another appears in committee testimony, what is virtually absent in the conversation is the exercise of federal regulations of derivatives tied to Mortgage Backed Securities and CDO’s, and transparency in reporting by the financial institutions, private equity and hedge funds that hold this debt, now cratering to the tune of hundreds of billions.

For its part, Wall Street and the home builders are adamantly opposed to any regulation that smacks of interfering with the “free” market. New urbanists, conservationists, civic activists: none have yet united around the theme of reforming Wall Street in order to build a more sustainable future in America.

Will political leadership emerge first, or, will a ravaged economy push forward the demand for change?

If the coming recession tells us anything, it is that the market for debt tied to housing is anything but “free”: literally hundreds of billions of dollars of equity has already vanished in Wall Street’s hall of smoke and mirrors, through which a whole new class of wealth built on fees generated by financial engineers succeeded in eroding the underpinning of the American middle class.

Regulating financial derivatives to achieve what is best for the common good, including a clear road map for financial derivatives, could steer the US economy in directions that stimulate a new, green energy future and also stop suburban sprawl in wetlands, stop growth based on expansion of highways into new areas, separating housing from places of work, and stimulate affordable housing and mass transit.

There is no end to the creativity that Wall Street can deploy, but there must be an end to the creativity that has turned the US economy into a basket case at the expense of passive consumers.

Only effective national leadership can provide that direction. Will it, is another question entirely, for the next president of the United States.