We’ve borrowed more than we can afford to borrow, sprawled more than we can afford to sprawl
There are a lot of moving parts involved in the current, sputtering condition of the economy, which can’t yet be declared a recession but may well become one. I’ll summarize as best I can. Very cheap credit led to a housing upturn, which became a boom, which became, in many parts of the country, a speculative bubble. The cheap credit was the result of a number of factors, including lax monetary police at the Federal Reserve, but of high importance were the huge foreign exchange reserves accumulated by a number of commodity-exporting nations, which led to a global savings glut.
Let’s make this simpler still. We have been sending massive amounts of dollars overseas. Lots have gone to China to purchase manufacturing goods. Many more have gone to oil-producing nations. The countries on the receiving end of those dollars could only invest and spend so much in their own country without fueling rampant inflation, so they looked abroad for savings opportunities and found lots of them in the United States. All those foreign dollars looking for borrowers made borrowing very cheap.
Along the way, a number of unusual financial innovations created new types of mortgage securities which sped the boom along, and new mortgage products made homeowners of many families with uncertain incomes and shaky credit.
By 2005, steady increases in interest rates were making people nervous about the sustainability of the housing boom. They were also making adjustable-rate mortgages more expensive. The housing bubble peaked and began to deflate, but the real trouble started when the financial instruments used to spread the mortgage securities throughout the banking and investing world unraveled. The growing losses led to sudden global stinginess, manifesting itself as a worldwide credit crunch. The days of easy borrowing were over.
The really unfortunate thing about the credit crunch was that American consumers were no longer able to push the economy along by borrowing and spending. With credit cards maxed out and borrowing against homes now impossible, households have been forced to spend only what they have on hand. What they have on hand has been shrinking for months thanks to steady increases in the price of oil, energy, and food.
There is a kind of poetic continuity through the entire process. Our oil addiction fed the growing foreign exchange reserves of oil exporters. Those reserves fed an exurban, low-density housing boom, placing ever more families in huge homes miles away from anything. Having further committed ourselves to energy-intensive lifestyles, we found ourselves unable to avoid rising energy costs. Those costs have chewed up our budgets, forcing us to cut spending on everything else we buy, helping to suck the life out of the economy at the worst possible time.
These are difficult times for many households, but we shouldn’t be too quick to overdramatize the situation. This is not a global economic calamity. This is not a depression. Most economists expect any recession to be short and mild, and then things will continue on as they did before.
That is unfortunate, in some senses. It is unreasonable to think that energy demand will shrink anytime in the near future. Economic growth in China and India has pulled hundreds of millions of people out of poverty, but it has also nudged the per capita resource use of their citizens toward developed-nation levels, significantly increasing the use and price of those resources. Demand has grown at home, as well. Our population is increasing, but the biggest contributor to increased energy use is the continued migration of households to areas where private automobiles are the only way to get around.
Energy supply is slow to respond. Our growing recognition of the peril of climate change has limited construction of some new electricity supply, and NIMBYism has limited more still. America’s oil production has been falling for years, and global oil production has not matched demand growth–perhaps because producers are unwilling to bring new capacity online, and perhaps because they are not able to. Barring a serious and unexpected economic collapse, it is nearly impossible to imagine energy prices decreasing in the near future.
And efforts to wean ourselves off fossil fuels may not be much help. This week, we learned that biofuels are incredibly costly and no cleaner than the conventional fuels they replace. What’s more, by competing with food production for scarce inputs, biofuel production has caused food prices to leap, further squeezing consumer budgets. Electric cars offer another option, but it’s difficult to imagine how our already strained power supply and infrastructure could handle upwards of 200 million cars drawing from the grid.
The cherry on top is that any effective program to reduce carbon emissions will make the consumption of energy even more expensive. In light of these facts, we should be asking ourselves some serious questions. What is the cost of the housing boom and accompanying migrations, which have placed millions of people in homes and lives with enormous carbon footprints? How are American households going to cope with steady increases in the cost of electricity, gas, and food? What can we do to fix this mess?
What we must do is provide alternatives. It is vital to encourage the construction of quality homes in dense areas. Families can’t buy well-made homes within walking distance of neighborhood amenities if they aren’t built, and new housing supply is overwhelmingly not that type of housing. It is vital to invest heavily in mass transit. Families can’t respond to high gas costs and choking congestion if a car is their only alternative. We must give families choices.
We have to learn these lessons. Otherwise, we’ll continue to pour tax revenues into the infrastructure of sprawl, while that very sprawl becomes less affordable. It’s a recipe for years of economic pain, of tight budgets and growing emissions. I think the economists are right that recovery is just a few months to a year away. If we don’t alter the way we live, spend, and use energy, it may not be a recovery worth looking forward to.