The coincidence of crises in the housing market and the financial system has pushed the U.S. economy into its longest period of contraction since the Great Depression. Faced with manifold drags on growth, the government's response to the upending of the economy and the modern finance system has been equally multifaceted. Following last spring's abortive attempt to reinvigorate the economy through a consumer-focused fiscal stimulus, subsequent initiatives have grown in scope, size and proportion with the depth of the crisis.
In particular, the failure of the traditional tools of monetary policy to reinvigorate the economy has prompted increasingly heterodox policy interventions by the government. A recent Bloomberg estimate puts the total value of all the programs and commitments at $12.8 trillion — an encroachment on private markets that would have defied belief as recently as a year ago.
The interaction of public and private markets is a feature of any economic system. To a great extent, economists even agree upon a set of “market failures” that can serve as preconditions for government intervention in the private marketplace.
Failures of agency and information asymmetry have more serious implications when undermining a keystone of the economy. Because of the ultimate threat that a collapse in the financial system presents for the whole of the real economy, public and policy attention has focused on the magnitude of losses incurred by financial institutions that are the lynchpins of access to credit.
As one example of the cascade, last year's atrophy in the market capitalization of the financial sector has now been eclipsed by the erosion of household wealth. Since reaching its peak in the second quarter of 2007, American consumers' net worth has fallen by almost $13 trillion. More than a third of this decline occurred in the fourth quarter of 2008 alone.
The implications of these losses are far-reaching. Just as rapidly increasing wealth prompted households to spend more than wage increases would justify, the erosion of wealth has fueled a reversal of the wealth effect. Increased savings and the slow process of consumer de-leveraging will ultimately set American households on firmer ground. For now, however, it has undercut an economy where personal consumption represents upwards of 70 percent of overall activity.
This reality has led to an unprecedented rise in government borrowing. Federal government debt grew at an annualized rate of 39.2 percent and 37.0 percent in the third and fourth quarters of 2008, respectively. The rapid increase in the government's obligations underscores the need for balance in short- and medium-term stimulus initiatives and the long-term growth potential of the economy.
As policy makers' attention turns to the unique challenges and needs of the commercial real estate industry, we must be vigilant in guarding against the potential for errors in policy making to dim the prospects for our sector as well as those for the wider economy's recovery.
Amongst the Obama administration's goals, the new Public-Private Investment Program (PPIP) seeks to free lenders from the full weight of their seasoned loans and generate liquidity in legacy securities markets. Inasmuch as the PPIP depends upon the participation of private investors for its success, the administration seems aware that it must proceed cautiously.
Out of a desire to ensure the program's success, however, caution must not give way to abandon. We must pause to consider that many of the mechanisms for risk-taking and risk-transference that have been singled out for scorn — and that are amongst the roots of the agency failures that fueled the capital markets' feast and today's near-famine — are also being relied upon to ensure the PPIP's attractiveness to investors.