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August 27, 2010 6:50 PM EDT
The U.S. government is stuck in a cyclical mindset while the real problem is structural. They are “[kicking] the can down the road, seemingly hoping for a series of immaculate economic recoveries,” said Mohamed El-Erian, co-chief investment officer of PIMCO.
The ailing economic recovery in 2010 stems from structural problems and is part of a “broad, multi-year” secular phenomenon driven by “national and global realignments.” In other words, it was not caused by temporary spillover effects from the Great Recession and cyclical stimulus measures will not revive the economy.
However, U.S. politicians are currently debating whether or not to enact yet another round of fiscal stimulus and/or quantitative easing.
What they should do instead is focus on “a broader and more holistic response” and implement “a structural vision to accompany their current cyclical focus.” Specifically, they need to address problems regarding the real estate market, credit conditions to small business and consumers and the jobs market, among other issues, El-Erian noted.
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Real Estate
The housing sector has been plagued by the lack of flexibility on the lenders' part to re-negotiate mortgages with homeowners who can afford lower payments. This increases foreclosures, floods the market with houses auctioned off cheaply, and depresses overall real estate prices, which completes the cycle by causing more mortgages to go underwater.
El-Erian and his fellow co-chief investment officer at PIMCO Bill Gross are also calling for housing finance reform, or how money is lent to homebuyers.
Gross suggests that the government guarantee the majority of existing and future mortgages to insure affordability for home buyers and remove private profit-seeking influences on government mortgage programs to curb distortions.
Consumer and Small Business Credit
Consumer and small businesses rely on banks for credit, and banks, especially the smaller institutions, are not lending despite the easy monetary policy of the Federal Reserve. These banks are struggling with losses on real estate loans. Regulators are also pressuring them to limit or shrink their balance sheets. Due to these factors, banks face pressures against issuing new loans.
Regulators should relax “accounting standards for the recognition of the [loan] losses” and “regulatory capital standards vis-à-vis these losses,” said Michael Menzies, CEO of a community bank in Maryland in a 2009 Congressional testimony.
Jobs Market
The structural problems in the U.S. jobs market is both partially responsible for and exacerbated by the high unemployment rate.
“We failed to educate several generations of workers to fill the kinds of jobs that we do need today. More than three million jobs went unfilled last year because employers couldn't find workers with the skills necessary to fill them,” said Diane Swonk, chief economist of Mesirow Financial.
Meanwhile, the large number of long-term unemployed individuals, which accounts for over 40 percent of the jobless population, are at risk for skill erosion.
To start remedying this situation, El-Erian recommended greater support for education and research and more job-retraining programs. Concurrently, the “vulnerable segments of society,” whose financial struggles are exacerbated by the Great Recession and the poor jobs market, deserve stronger social safety nets.
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