Bidenomics won’t lead to a smooth outcome.
In the contrast between elites — in Washington and on Wall Street — and the working-class Americans across our country, two words banded about in recent months stand out: “soft landing.”
In economic parlance, the term refers to whether a combination of monetary policy decisions by the Federal Reserve, macroeconomic forces, and sheer good luck can manage to lower inflation levels without crushing economic activity to the point that it causes a recession and/or massive job losses.
But to people in the nation’s heartland, the words “soft landing,” as they relate to our economy, represent something between a misnomer and an insult. On multiple levels, millions of families have been getting kicked in the teeth for years — and will continue to do so, whether a recession arrives or not. To suggest that there’s anything “soft” about it just shows the people who run our economy are out of touch.
Inflation Baked into Prices
A few weeks ago, the latest inflation report showed that the consumer price index rose by “only” 3.7 percent in September. That’s down by more than half from the 40-year high of 9.1 percent in June 2022. But lower levels of inflation haven’t begun to solve the problems created by “Bidenomics.”
While inflation may have abated somewhat — that is, prices are rising more slowly — the American economy hasn’t experienced deflation, with prices actually falling. Even if the price of a hypothetical sofa may remain at $1,200 for a while, it has very little chance of dropping back to the $1,000 level where it stood before inflation took off during the pandemic.
But people who walk into that furniture store — or the grocery store, or stop by their gas station — still have sticker shock every time they go to buy items. Their incomes haven’t kept up with the spike in prices over the past few years, so they feel poorer — because they are poorer.
Home Ownership: Haves and Have-Nots
Over and above the question of family budgets, families face tough decisions about where to live. A decade-plus of questionable monetary policy has created a two-tiered housing system since the pandemic that will take years, if not longer, to unwind.
A friend of mine faces the dilemma that many young families are contemplating: He and his wife can’t afford to buy a home. They make good money and don’t live in an area (like Washington or San Francisco) with very high home prices. But the yo-yo-ing of monetary policy has effectively put homeownership out of reach for them.
Consider what it now takes to buy a home costing $500,000. Assuming a 10 percent down payment and an interest rate of 8 percent — mortgage rates have approached this level in recent weeks — the estimated monthly payment comes to $3,489. That monthly amount doesn’t include taxes or insurance — and it assumes that a family has more than $50,000 up front to fund a 10 percent down payment and closing costs.
But if mortgage rates were still at the 3 percent level, their monthly payment would come to only $2,085. The difference amounts to over $1,400 per month in interest costs alone. And for many families, that sum is the difference between having an affordable home within reach and having to put the “American Dream” on hold.
Undoing the Fed’s Damage
Seeing these numbers, many people would point the finger at the Federal Reserve’s interest rate policies for causing this mess. The Fed is one major cause of the problem — but not for the reason one might think.
Prior to the early 2000s, mortgage rates of 6 percent, 7 percent, 8 percent, or even higher were the norm, not the exception. But over the past two decades, financial markets — both the stock market and the housing market — have become addicted to cheap cash at ultra-low interest rates. Over that time, the Fed has largely obliged, printing money on numerous occasions since the financial crisis to keep interest rates arbitrarily low.
That money-printing helped stoke inflation since the pandemic, which the Fed is now trying to resolve by raising interest rates back to more historically appropriate levels. But it has also exacerbated inequality by creating asset bubbles and setting up classes of “haves” and “have-nots.”
Over time, the dynamic outlined above will have an effect on housing prices. Even if the housing market doesn’t crash, prices will either stay flat or soften for several years, because a house that’s affordable with a 3 percent mortgage can easily become unaffordable when mortgage rates hit 8 percent.
But the “haves” — those families lucky enough to have locked into low-rate mortgages over the past few years — won’t want to sell if doing so means they need to take out a new mortgage at a much higher rate. As a result, it may take years for the housing market to become “un-stuck,” as no one will want to move. This dynamic will also likely affect the job market because relocating to take a new position now imposes a huge financial penalty given the change in mortgage rates.
Long Return to Normalcy
The bottom line: Undoing all the damage of this ill-advised monetary policy — beating back inflation, and moving to a stable housing market not pumped up by cheap Fed money — will take time and impose sizable economic costs on families across the country. And that’s assuming that all this credit tightening doesn’t spark a major recession, another financial crash, or both.
Given the level of pain involved in this adjustment — both that already inflicted and that yet to come — no one should give the Fed credit for “engineering a ‘soft landing’” even if the economy doesn’t crash. Just as an arsonist should win no points for putting out his own fire, no one should lionize the Federal Reserve if it manages to resolve economic problems largely of its own making.
To what extent are the Federal Reserve’s interest rate policies responsible for the current housing crisis and inflation since the pandemic
The article analyzes the contrast between the elites in Washington and on Wall Street and the working-class Americans across the country, focusing on the term “soft landing” in relation to the economy. It emphasizes that for the people in the nation’s heartland, the notion of a “soft landing” is seen as a misnomer and an insult, as millions of families have been struggling for years and will continue to do so, recession or not. The author argues that the current lower levels of inflation have not solved the problems caused by “Bidenomics,” as prices continue to rise, causing financial hardship for many families.
The article highlights the issue of home ownership, stating that questionable monetary policies over the past decade have created a two-tiered housing system that will take years to rectify. Many young families, despite making good money and residing in affordable areas, are unable to afford a home due to fluctuating interest rates. The article provides an example of the cost of buying a $500,000 home with a 10 percent down payment and an 8 percent interest rate, resulting in a monthly payment of $3,489. Comparatively, if the interest rate was still at 3 percent, the monthly payment would only be $2,085. This significant difference in monthly costs makes homeownership unattainable for many families and puts the “American Dream” on hold.
The article suggests that the Federal Reserve’s interest rate policies are partially responsible for the current housing crisis. It explains that while higher mortgage rates were once the norm, financial markets have become reliant on cheap cash due to the Fed’s actions of printing money and keeping interest rates artificially low. This cheap cash has contributed to inflation since the pandemic, which the Fed is now trying to address by
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