Scarcely a soul will recall that political pressure over red-lining was partially responsible for the subprime failures in the first place. It is reminiscent of John Edwards’ lamentation about the subprime mess at the same time investing in a mortgage company that benefits from the foreclosures.
Although the mortgage problem will adversely affect the poor and those areas that engaged in wildcat real estate speculation like Florida, the global economy has displayed remarkable resilience. Inflation is low; the equity bull market is in its fifth year, valuations are reasonable in most regions and employment numbers and consumer spending are robust. That is the backdrop for the subprime mortgage problem.
Should the housing market stress persist, there is little doubt equities will struggle and the bears will rouse from a long slumber. But rather than wager on a recession, I would contend the current problem will introduce a degree of sobriety into credit markets and, in the long term (five years?), the supply side effect of globalization, technological innovation and market reform will shift the markets into a positive stance.
In the short term, however, there will be social detritus. The subprime borrower may face bankruptcy and foreclosure, a prospect that even the most hard-hearted will lament. Typically these borrowers take out equity in their homes to pay off outstanding consumer debts. With the on-going tightening in the credit market those days are past and with it will come economic gloom for many and credit reverberations through the economic system. As noted, this won’t be a recession, but for many it won’t be a pretty picture either.
Herb London
Herbert London is president of Hudson Institute and professor emeritus of New York University. He is the author of Decade of Denial (Lanham, Maryland: Lexington Books, 2001).
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