My Mortgage Blog

Alas, my friends. I have fallen behind in my coverage of the economic zoo and need to catch up. You can therefore expect an extra column or two in the coming few weeks right when, thanks to the rest and relaxation provided by the Holidays, you will have the time to read by the fire in the evening. At least, that is how I like picturing your experience of the coming few columns.

Let me begin by saying that I wish I had a relatively full picture of what the next few months will bring us economically. I don’t, but Id like to relay to you the thoughts of an analyst whom I admire who thinks he does. He has some rather definite ideas about the approaching fiscal cliff (which may have dropped us all in a big painful heap at its base by the time you read these words, but probably won’t have).

Alexander Green, Chief Investment Strategist for a periodical called Investment U very recently wrote an article with the provocative title, Why the Fiscal Cliff Will Happen For About a Week. Notice deep inside your gut whether the title inspires a rapid assent from you. A yes. That’s where the truth, as best we can know it, speaks to us.

Green is certain that our politicians will both take us to the precipice, the very edge of what might look like disaster, and then whisk us to something advertised as safety.

Green says there are good reasons for optimism today. (You’ll notice that he likes to challenge many of his reader’s assumptions.) The fiscal cliff is, he asserts, one of several reasons to be relatively confident in the near-term economy. Why? First, because it isn't going to happen. And, second, because it will set the stage for genuine reform.

Our politicians, Green argues, are simply not going to throw the economy back into recession by letting the fiscal cliff become a reality. Instead, Green expects Washington to shout and dither its way over the edge of the cliff, then leave the tax rate a bit higher for the top 2% of our nation’s earners.

Green expects a deal will be struck fairly quickly regarding spending and the cutting of spending. Will it be done well? Probably not but it will be done, he affirms. And then we will discover that the real looming crisis is not the fiscal cliff on January 1. It's the current entitlement system that in its present form is absolutely guaranteed to come undone by time and arithmetic’s.

Greens argument, though I’m still a tad skeptical, has its strengths. He is probably right that it would be close to political suicide for any politicians to allow us to fall again into recession. But his certainty that the future looks relatively bright in spite of the fact that were about to encounter the mathematical time-bomb built into our current system of entitlements leaves me as worried as I was a few minutes ago.

Yes, good it may mean that resolving the fiscal cliff and evading another recession will bring us face-to-face with the fact that we cannot long pay for what we want to provide ourselves and our citizenry. And that bringing us face-to-face with that fact may cause us to hazard some realistic answers to the problem. But the answers that have so far been raised haven’t gained enough traction to become law. If we get past the fiscal cliff, why will we be any better at coming up with mathematically and politically feasible ways of correcting the course of our system of entitlements? The politics mean that we have two powers, diametrically opposed to one another’s ideas, trying to fashion elegant solutions while dodging the political fights.

Another reason for the fragility of my confidence: We’ve been climbing with great difficulty out of a recession that began, arguably, because our system of financing homes had lost its way. It was reasonably clear that we needed a thorough and ingenious review of the ways we finance home purchases. New loans. New ways of qualifying borrowers. New ways of securing home ownership.

What have we done? We’ve tightened qualification and appraising requirements. We’ve created a lingering class of homeowners the underwater owners who cannot make any changes in their financing or home ownership . Its as if were sitting around waiting for someone else to see the light and make the needed proposals. Revolutionary proposals. We will have to do better than this or it will be even harder to recover next time than it has been for several years.