Smart. Sharp. Funny. Fearless.
Thursday, October 27, 2016

We can thank Ben Bernanke for the phrase “fiscal cliff” – a phrase many observers have tried to soften by pointing out they think it’s more like falling down a slope, sliding down a curve, or even tripping over a curb. I can understand trying to find other metaphors to replace the nearly always fatal results of going off a cliff.

But maybe those observers missed one effect that Bernanke knows drives the economy more than any else: housing.

You’d think we’d know by now that America’s economy depends on housing more than any other industry. Certainly the fact that unemployment is still nearly 8% while corporate profits have roared to all-time highs is a clue. So is persistently low consumer confidence in spite of those stellar profits and a stock market that has nearly doubled over the past four years.

But housing is at least stabilizing nationwide, and even heading upwards in the regions hit hardest by the housing bust that started the “Great Recession” in the first place.

But we’re not out of the woods quite yet, and one aspect of the impending spending cuts that begin January 1st is almost certain to change that progress on the housing front into a full blown retreat. And that retreat will start immediately, not gradually over the year, as do the other effects of the law passed in 2011 following the debt ceiling hostage crisis.

Starting this week, two million unemployed people now collecting extended federal unemployment benefits will get nothing. What if a million or more of them have mortgages? Will they be able to pay? Not bloody likely. People who have been out of work longer than six months generally don’t have much in the way of savings left.

That’s the reason extended unemployment benefits is such a huge winner when used as a stimulant for the economy. Unlike infrastructure spending, which takes months or years to begin to have a “multiplier effect” in the economy, extended unemployment benefit money gets recycled into additional activity almost immediately. Most economic studies show that roughly $2 of increased GDP comes from each dollar of unemployment benefits.

Contrast that with deficit spending resulting from tax cuts. That kind of spending only gives pennies in GDP growth for each dollar borrowed to subsidize those cuts.

The reason Bernanke called the impending fiscal policies in the “sequestration” a cliff was probably not because those who do have jobs will have more taxes taken from their pay, though they certainly won’t be spending more money and growing the economy with those smaller paychecks. That’s a small and gradual effect. The reason he called it a cliff is that the most destructive single thing you could do to our economy is to hurt, yet again, the largest asset of all but a few of us – our homes.

So before we say that it doesn’t matter when they fix the gun-to-the-head spending cuts and tax hikes that begin this week as long as they fix it over the next few weeks or months, consider what will happen to the value of your house if your neighbor goes into foreclosure next month. Two million neighbors are already having a hard time making their payments for the basics like housing and food. Surely some of them will fail when their main source of income is suddenly shut off.

Howard Hill is a former investment banker who created a number of groundbreaking deal structures and analytic techniques on Wall Street, and later helped manage a $100 billion portfolio. He writes and blogs at Follow on Twitter: @hhill61

Click here for reuse options!
Copyright 2012 The National Memo
  • charleo1

    One of the many things I can’t get my head around, is why the corporations, and big money
    players would rather see the destruction of the Country’s Middle Class, than agree to take on
    a bit more taxes, if it helps their most profitable market find new jobs, and hold body, and soul
    together until they do. One cynical reason might be a goal to completely reset the wage, and
    entitlement structure of The United States, downward on a par closer to that of third world countries.
    That would of course mean, among other things, any semblance of patriotism from these
    CEOs, who are also American citizens, that live, perhaps not in most of our neighborhoods,
    but in this Country. That America represents nothing more than just another cash cow to
    slaughter, before moving our, “investments,” on to the next opportunity. But, I must reject
    all that. For the same reasons as I also reject the possibility of ever needing our guns to protect our families from our own military. Because our military is made up of our families. That is why I fail
    to understand the motivation of a few to hold an entire Nation hostage, because they don’t
    believe the best interests of the Country are more important than them being able to say, I never

  • bcarreiro

    We the people would have been better off today if Boehner and the republican party had delt with the problem at hand when Obama was elected the first time……..they have spent their time trying to make him a one term president. This is the basis of their agenda and not at all for the people who made them who they are. Obama’s plans for moving forward have been on his forefront from the beginning and they should be held accountable for putting america in jeopardy. We the people can decide what is good for this country, not just a selected few who are to rich to know what to do. you have created this fiasco in the first place and why should middleclass pay your way anymore!!! before we can deal with any crisis we need to deal with this awful congress first!!!

    • The extension of the Bush tax cuts to 1/1/13, and the automatic spending reductions put in place by the GOP when they agreed to raise the debt ceiling over a year ago, were supposed to encourage debate between the two parties and find ways to reduce the deficit, borrowing and accumulation of debt. Instead, no progress was made on this issue throughout the last year and here we are, hours before we all jump down the fiscal cliff, with no agreement or even a blueprint in place.
      The clowns in Congress could not get a janitorial job in private industry, and I suspect they know it.

      • bcarreiro

        how true and i think congress needs a house keeper not a house speaker…lol

  • clarenceswinney

    Increases by:
    Reagan=10% per year
    Bush II=11% per year
    Obama=1.1% per year
    Amazing is it not

    • TheOldNorthChurch

      Clarence what was the spending in 2008 vs today? Do the Math over here is the formula: 2008 – 2012/ 2008 =

    • onedonewong

      Gee you left out the $10 Trillion in new debt that barak generated

  • If the scheduled end of the Bush tax cuts takes effect on 1/1/13, and the automatic spending reductions put in place by the GOP as a condition to raise the debt ceiling over a year ago goes into effect as scheduled, the entire economy, not just the housing market, will go into another deep recession.
    By refusing to keep the current tax rate for 98% of Americans and 97% of small businesses, because the GOP does not want the tax rate of the remaining 2% to go back to Clinton era levels (a 3.6% increase) would deprive the economy of the spending potential it needs to flourish. Similarly, by enacting indiscriminate spending reductions, that require massive layoffs of civil servants and contractors, unemployment will go up immediately.
    I suspect the Tea Party is well aware of the consequences of their intransigence, and persist on their obstructionist goals precisely because they know what is about to happen. Their goal remains to make the Obama administration and Democrats in general fail, even if doing so means destroying the United States.
    Their obtuse ideology, which has austerity as its centerpiece at a time when our feeble economy needs investment, is the last thing our economy and our country needs at the moment. We need to increase revenues – targeted to reducing the budget deficits – and we need to reduce spending, but we must ensure the latter is done without impact to the economy, our national security, our most vulnerable citizens, and our standard of living.

    • TheOldNorthChurch

      Dominick the Tea Party wants to return to the Clinton ERA Tax Rates and the Clinton ERA Spending Rates of 18.5% GDP. On the first point they are on the side of the Democrats who have long fought for the expiration of the Bush ERA Rates. GDP for the last five years minus borrowed money from Federal and State Governments has been negative. There has been no recovery.

      Housing Prices are up, Stock Prices are up, Gold and Silver prices are up yet; All with real earnings down and Employment participation down. How has this happened? QE1, QE2, QE3, TARP and Stimulus spending. Hidden Inflation which will start showing up now in the next year. We have $275 Billion in interest payments for the National Debt at 1.9%. The FED has been inflating the Money Supply to keep this artificially low and its activity is killing the Middle Class. What happens when interest moves up to 4%? Do the Math: Its $275 x 2 = $550 Billion in Interest Payments! Medicare will equal $501 Billion in 2013.

    • onedonewong

      Time to do the right thing retore the clinton era tax rates and clinton era federal spending

  • clarenceswinney

    Big Spenders
    Increases by year(avg)
    Bush =11%
    Obama=2.2% (not 1.1 as listed prior)
    Obama numbers
    Bush last fiscal year=3500B
    Obama 2013 fiscal budget=3800B
    8.8% increase or 2.2% per year

  • elw

    The GOP are like radical bombers, willing to kill themselves for a point and unconserned about who it hurts.

  • And, of course the extremists on the right will try to paint a picture of President Obama as the reason for failing to “negotiate” with them.

    However, the American public ALREADY KNOWS who is responsible for failing to negotiate. And, it isn’t President Obama.

  • Time these idiots are gone. They are worthless. If we the American people do not put a stop to these idiots it will be our worst mistake ever. They need to be recalled and to never run for any office again.

  • onedonewong

    I have no problem extending the benefits as long as the taxpayers get something back in return, Thy should be required to do 40 hours a week in community service, from painting sweeping picking up trash or emptying bed pans. Using the authors logic why not have everyone on dole because it grows the economy…..
    This idea of letting them stay home and do nothing is a joke. Heck they aren’t even required to show they were looking for a job.

    • I can’t let your false assertion about what is required stand. Of course they have to show they were actively pursuing employment. Please correct your own impression by finding out the truth. Why is it so easy for such lies to propagate? Is it because you and your fellow “conservatives” simply enjoy whining, or do you really think you are “victims” of these awful people on the dole?

      Only in America do we see millionaires envious of those reduced to using welfare to put food in their children’s stomachs.

      • onedonewong

        Howey its obvious that you have no idea how unemplymnet woks in the blue states. Its done by phone …press 1 if you have looked for work press 2 if you haven’t looked for work.
        The days of providing names addressa dn dates ended with carter