Brooklyn's Progress
October/November 2008

BY JOEL L. NAROFF, PH.D.

Every month we get new economic data that contain glimmers of hope that the housing market may be bottoming. Despite that, the problems this sector has created seem to be hanging on. This may be changing, but it has taken government intervention to give the weakest economic link a life raft. Whether the takeovers of Fannie Mae and Freddie Mac ultimately do the trick is something that may take time to determine. But at least now we know that another major uncertainty has been removed.

Hopefully, this was the summer of the housing market’s final blow-out. The two huge government-sponsored mortgage agencies, Fannie Mae and Freddie Mac, finally succumbed to declining home prices and questionable management decisions. The government takeover was necessary as these two organizations were basically the lubricant for the mortgage markets. They allowed financial institutions to make mortgages and then sell those mortgages so they had the funds to make even more mortgages. 

Unfortunately, like other financial institutions, as prices fell, Fannie and Freddie found that they were suddenly losing money. This reduced available funds for mortgages and, given the weakness of the housing market, something had to be done.  Together, these agencies had more than six trillion dollars in mortgages and they were way too big to fail.  Allowing them to crash likely would have led to a collapse of what is left of the housing market. The takeover ensures that funding for home buyers will continue, and at a pace that would not have been the case with weakened agencies.

The hope created by the bailout is that with more mortgage money available, rates will fall, home sales will improve and prices will start stabilizing. That is critical not only for the health of the housing and financial sectors but also the economy in general. And that is needed as the labor market continued to soften during the summer. 

In August, businesses cut more than 100,000 workers from payrolls and the unemployment rate jumped to 6.1%. This is the highest level in five years. As expected, with few people buying gas guzzlers, the motor vehicle makers sliced deeply into their workforces.  But financial institutions, hotels, airlines, supermarkets, department stores and most other places no longer visited by consumers also reduced employment levels. The only good news was that wages continued to rise decently, so there is some money flowing into household bank accounts.

Looking forward, the situation remains muddled even with the government’s actions.  But at least now it seems that mortgage money will continue to flow. Yes, there are many questions to be answered about what the taxpayer will have to pay for the privilege of a better operating mortgage market. And the role of government in the economy has taken a new turn as bailouts have become a matter of policy. But ultimately, we were going to have to pay the price for irresponsible lending, bad government policy, failed regulatory oversight and fraud. The questions are “how much” and “when?”  That we are paying it now rather than later, likely will lower the cost to, and accelerate the time when, the economy can get back to growing solidly. 

Joel L. Naroff, Ph.D., is Chief Economist for Commerce Bank. Commerce Bank, America’s Most Convenient Bank, is a leading financial services retailer with more than 475+ convenient stores in New Jersey, New York, Connecticut, Pennsylvania, Delaware, Washington, DC, Maryland, Virginia and Florida. Following TD Bank Financial Group's acquisition of Commerce Bancorp Inc. on March 31, 2008, it was announced that operations of TD Banknorth and Commerce Bank will be combined under the brand name TD Bank, America's Most Convenient Bank®. Today, TD Banknorth and Commerce Bank form one of the 20 largest commercial banking organizations in the United States with $120 billion in assets, and provide Customers with a full range of financial products and services at nearly 1,100 convenient locations from Maine to Florida. TD Banknorth and Commerce Bank are trade names of TD Bank, N.A. For more information about Commerce, please visit the company’s interactive financial resource center at commerceonline.com, or call 888-751-9000.