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With the conservatorship comes an important question

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Unformatted text preview: With the conservatorship comes an important question: Should the debt of the GSEs be consolidated with the federal debt? Because the U.S. government has only a 79.9% and not an 80% stake in the GSEs, it does not technically have to consolidate the GSEs’ accounts into the federal budget. (It also does not have to assume the pension liabilities of the GSEs.) We believe that it should do so, because the GSEs are de facto backed by the full faith and credit of the U.S. government debt. However, that implies that the national debt as of July 2010 is not $8.7 70 trillion, but $10.3 trillion. In fact, the tax payer is ultimately liable for the default risk on all $8.1 trillion of GSE debt and GSE-backed securities. (But, of course, the consolidation would also move the GSEs’ assets into the federal government’s accounts.) 5.3 Anemic Recovery While the recession in the U.S. likely ended in the summer of 2009, the country’s macroeconomic problems are far from over. The current recovery has seen anemic employment growth. The housing market has barely perked up. New residential construction and applications to build new homes hit rock bottom in July 2010. New home sales declined to the lowest level ever recorded in May 2010, since records began in 1963! House prices have recovered modestly from a low point of 152 to 160 in May 2010, according to the Case-Shiller 10-city index, but are facing continued headwinds from mounting foreclosures. The 930,000 foreclosure filings in the first quarter of 2010 were up 16% from a year earlier. An additional 895,500 notices were filed in the second quarter of 2010, up 1% from a year earlier. It seems that the number of loans that are entering delinquency is abating, but the number of loans moving through the foreclosure process is still increasing. Large inventories of unsold homes, which are around 10 months worth of supply, further hamper house price recovery. The homeowner vacancy rate of 2.5% is much above the long-run average of 1.7%. Finally, the expiration of the $8,000 federal tax credit for home purchasers at the end of April 2010 caused sharp drops in construction activity and in builders’ share prices. Faced with these headwinds, the U.S. homeownership rate reverted to 66.9% in the second quarter of 2010, its lowest level since 1999. This means that all the gains made during the housing boom have been negated. In the previous housing bust of the 1990s, it took four years for house prices to recover from the bottom to their previous peak. Given that the 1990 cycle was substantially milder than the current one, we doubt that house prices will return to anywhere near their 2006 peak before 2014. One important factor that hampers recovery is household debt. Including credit card and other debt, households collectively owed more than 114% of GDP, or $16.4 trillion in the first quarter of 2008. That is 30% of GDP, or $9.4 trillion more than just ten years earlier. This indebtedness makes households reluctant to spend, as they are repairing their balance sheets. indebtedness makes households reluctant to spend, as they are repairing their balance sheets....
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With the conservatorship comes an important question Should...

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