Christopher Thornberg: Short-Term Recovery Comes at Long-Term Cost

While government intervention is boosting the US economy, including the housing market, it’s only delaying inevitable future declines in growth, Christopher Thornberg, an economist and the founding principal of San Rafael, Calif.-based Beacon Economics, said during a keynote address at REO Expo, currently underway in Dallas. “The trends are good,” he said, noting recent economic growth, “but the fundamentals are bad,” Thornberg said, referring government intervention in the economy, including the housing market. The federal initiatives had three programs to stimulate demand for homes — the homebuyer tax credit, the Federal Reserve’s $1.25trn mortgage-backed securities purchase program and an increase in originations of Federal Housing Administration (FHA)-backed mortgages — but also restricted supply by implementing Hope for Homeowners to keep distressed borrowers in their homes. Those forces counteracted each other. “If you’re going to restrict supply, don’t boost demand,” Thornberg said. The policy was counterproductive in helping eliminate the massive inventory of foreclosures and pending foreclosures on the market. Getting rid of that inventory is now only going to be harder. “We still have millions of foreclosures to deal with. The only thing that’s happened is that we’ve pushed it more into the future, but all the demand programs will be gone by then,” he said. “I equate it to going to the bar, drinking a lot of booze and you start to get a hangover, so you drink some more. Sometimes you just need to have a meal and try sleep it off.” The Fed’s MBS purchase program was funded with excess cash generated by the Treasury. When you print all that cash, you create the potential for inflation, Thornberg said. As for the other sectors of the economy, short-term signs show improvement and growth. Thornberg said he believes the recession ended three quarters ago. But the fundamentals of that growth indicate that it won’t be sustained long-term past this year. “Enjoy the next year, but watch out because 2011 and 2012 have the potential to be interesting,” Thornberg said. Thornberg advised conference attendees to not take the economic struggles in Greece and Europe lightly, and warned at some point, it will affect the United States. “At some point, they’re going to say maybe the US is the next Greece,” he said. “The worries about sovereign debt are going to spill over into the American economy.” Write to Austin Kilgore.

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