Yet despite these economic rescue and repair programs, the continued substantial overall weakness in the US real estate marketplace reflects and warns of trouble. In particular, what do the housing sector and its consequences for the consumer balance sheet suggest? One should view real estate in the context of consumer confidence. The foundation for and structure of the recovery fabricated by the homespun policies of the Fed and the political herd is fragile. Although progress has been made, the shattering damage of the international economic disaster that commenced in 2007 has not been fixed. Though the worldwide economic recovery that emerged in spring 2009 is not entirely a house of cards, it’s also not entirely built on solid ground.
Nominal GDP growth is better than none at all, right? All else equal, money printing does not over time breed permanent real GDP growth. Also, deficit spending borrows from the future to spend in the present; it may boost current output, but at the end of the day, this factor primarily involves a shift of money between players and across time. All else equal, even if a slump in the broad real US trade weighted dollar benefits the US economy, that tends to undermine those of many of its trading partners. Holding policy interest rates such as Fed Funds low does not preclude higher yields later. Don’t those substantially in debt or suffering injury to their net worth often endorse easy money policies? Despite optimism indicated by rosy prices in the S+P 500 and lofty corporate profits, US real economic growth probably will be mediocre looking forward from now. What happens to American real estate still matters a great deal for the global economy.
Given the still-weak home and commercial real estate marketplaces, the net worth of many banking institutions probably is vulnerable to marking-to-market of existing real estate loan portfolios. Renewed economic weakness of course would worsen that problem. In any event, banks nervous about their capital strength will not hurry to significantly expand their overall lending.
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