By William A. Galston
From the FINANCIAL TIMES:
…Finally, Mr Obama continues to rely on a diagnosis of America’s economic woes that misses the heart of the matter. If financial crises really are different from cyclical downturns – as economists Kenneth Rogoff and Carmen Reinhart have argued – then traditional demand-side policy responses are palliatives rather than cures. (So are the supply-side tax cuts at the heart of contemporary conservative economics.)
If the epicentre of the current stagnation is excessive household debt, which more than doubled as a share of household income between 1982 and 2007, then we face a choice: Either we wait for deleveraging to occur on its own – a slow, painful process that will take another five years – or we can work to accelerate it by attacking household debt at its core. That would mean pressing creditors for reductions in principal amounts as well as interest rates mortgage debtors must pay – a step the administration has thus far rejected.
In the end, the 2012 presidential election will revolve around two key variables – the condition of the economy and the identity of the Republican nominee. Making the most optimistic assumptions, the economy is unlikely to improve enough during the next year to substantially improve Mr Obama’s prospects…
Click here to read the full article.
EDITOR: If financial institutions forgave debt on mortgages that were ‘underwater’, most of the financial institutions would show that they were insolvent and the entire world economy would come crashing down. So it is going to a matter of several years before things work themselves out. Meanwhile, we remain in recession…if not worse.
