Hope

"Steady, but not spectacular growth," was the prognosis of Raghuram Rajan at the U of C Booth School of Business Forecast Luncheon this week. This forecast was remarkably consistent among the forecast offered by three economists-- Erik Hurst, Randy Kroszner, along with Rajan. As we struggle to pull ourselves off the mat from the worst downturn in a couple of generations, we are finally beginning to see some sunlight.

Kroszner, former member of the Federal Reserve, credited Ben Bernanke for keeping us out of a 1930's like depression and is perplexed by the criticism that has been leveled at Bernanke as of late. "No good deed goes unpunished in Washington," noted Kroszner. He further expanded on Truman's aphorism that "if you want a friend in Washington, buy a dog," to "if you want a friend in Washington, buy 2 dogs because one will turn on you." While we will have steady growth next year due largely to business investment and productivity growth, Kroszner believes it will be subdued because of tax uncertainty and government spending that is 2% higher than the 50 year range.

Rajan was the most guarded of the three. He believes that political risks are increasing, and that gridlock is not good with a deficit at 10% of GDP. Europe, he said, is an example of what happens when politics breaks down. He agreed with Kroszner that the Fed did a great job of averting a catastrophe in '08, but is worried about QE2 and its potential for igniting inflation.

Perhaps the most interesting comments were given by Erik Hurst, who presented data to suggest why the recovery will be slow. We are building back assets after a deflation in real estate and equity assets. This recession is fundamentally different than the big recessions of '74 and '81-82. Unemployment has huge variations. Not surprisingly, states that participated in the real estate boom and subsequent rollback (FL, NV, AZ) have the highest unemployment rates. All of these construction workers and other workers related to real estate will need to be realloccaed. He asserts that it took 6-10 years to draw these workers into real estate related industries and will take time to work through.

Most sobering, Hurst noted that each country that has experienced a real estate boom and bust throughout financial history has experienced no real recovery in housing for a long time. Hurst projects that housing will experience no greater than a 0-1% growth for a decade.

The good news is that we appear to be poised to crawl out from under The Great Recession. The bad news is that we appear to have learned little from the crisis. Tim Geithner envisioned a continued large role for the government in housing. Fannie, Freddie and CRA still survive. Financial reform did not effectively deal with the "Too Big to Fail" and we are a month away from year end and we don't know what taxes will be like in 2011.

Someone asked the panel who the chief spokeperson was for the free enterprise system. There is no one of the stature of Stigler, Hayek or Friedman. But Hurst noted that those giants had largely won the argument and today's position is more nuanced. There is much broader consensus today that there is some role for government but it needs largly to ensure that incentives for the proper allocation of capital need to be reinforced.

It's too bad that, with respect to residential real estate, government permitted those incentives to go horribly awry.