A problem with most humans is that we’re really bad at letting go of what happened yesterday. So too with nations. When estimating potential threats, it’s easy for leaders to adapt to whatever happened in the latest conflict, developing their military accordingly.
Think of the U.S. after World War II. We built up land forces across Europe to guard against an invasion by the U.S.S.R. Later on in Vietnam we dove into jungle warfare, where tanks and mass forces were less useful. We were set up to fight the last war, not the next one.
In our economy we do the same thing. We develop economic policies and responses that work great, as long as history repeats. When things stray from the script, we run into problems.
For six long years, the Fed has been fighting the last war.
In an effort to bolster the housing sector after the subprime crisis, the Fed has held rates at record lows to make debt cheaper. At the same time, it gobbled up trillions of dollars’ worth of mortgage-backed securities, hoping to free up new capital to buy newly originated mortgages. The hope was that by getting the housing market back in gear, home builders would crank up production, and hundreds of thousands of new, middle class jobs in construction would appear.
But something strange happened on the way to economic recovery. Housing didn’t bounce right back. In fact, the housing market kept falling for two more years as excess supply and the heavy weight of mortgage indebtedness worked through the system.
When real estate finally turned around in terms of prices paid and units sold, the gains weren’t exactly stellar. And as recent reports show, new home sales are growing, but not very quickly. The annualized rate of new home sales in April was 517,000 units. That’s a far cry from February 2011’s level of 270,000 homes sold — the lowest in 50 years. But it’s light years away from July 2005’s staggering 1.389 million.
