By Stephen A. Myrow
With health care reform stuck in purgatory, the focus in Washington has shifted to financial regulatory reform "to avert the next crisis."
Without question, smarter regulation crafted with an eye toward the modernized structure of the financial system could have at least mitigated the present financial crisis. This, in turn, could have prevented the onset of the ongoing economic crisis. However, it would not have stopped the incipient cause of our current precarious situation -- the housing crisis.
After all, to refer to the cause of our collective predicament as the "financial crisis" is a misnomer. The financial crisis is only one of three distinct, yet interconnected crises -- wedged between the "housing crisis" and the "economic crisis" -- that continue to weigh on both Main Street and Wall Street.
The housing crisis started on Main Street. It was a traditional asset bubble with many catalysts, including politicians aggressively promoting homeownership, mortgage brokers focused solely on commissions and homebuyers with desires larger than their wallets.
Wall Street, primarily banks -- with the help of excessive leverage, under-regulated securitization markets, poor risk management, lax regulators, credit rating agencies and investors in search of greater yield -- misplayed the housing bubble and created the financial crisis.
The financial crisis clogged the gears of our credit economy. This exponentially amplified the adverse impact of the housing crisis, creating a broader economic crisis that spilled back on to Main Street in the form of the Great Recession, complete with double-digit unemployment.
Some analysts have prematurely declared the housing sector stabilized. As the song from
goes, "It's funny how falling feels like flying, even for a little while." At best, the housing crisis is in a pause before it enters the next phase. Several key indicators raise concern, such as rising negative equity, increasing delinquencies and foreclosures, approaching option-ARM resets and sustained high unemployment.
Furthermore, the apparent stabilization of the housing market is based on an unprecedented level of government support, which is facing significant headwinds in the coming months. From the termination of the
's mortgage-backed securities purchase program to the expiration of the homebuyer tax credit and the Federal Housing Administration's dwindling reserves, monetary and fiscal stimulus measures are falling prey to waning political support and limited budgetary resources.
While the housing, financial and economic crises emerged in serial fashion, they remain contemporaneous and inter-related problems. As the housing crisis lurches into the next phase, it will continue to adversely feedback into the financial sector and the broader economy.
This will put more pressure on the Obama administration and congressional incumbents to demonstrate some level of meaningful response, particularly as the mid-term elections draw near. Many in the nation's capital will be lured to increase populist rhetoric aimed at an easy target -- Wall Street.
Regardless of the responsibility that some financial firms bear for exacerbating the fallout of the housing crisis, populist attacks on Wall Street will not abate the economic pain that Main Street will continue to endure. Like the aftermath of Hurricane Katrina, there is a real risk that the personal catastrophe of the housing crisis will create a political catastrophe for the Obama administration and incumbents in November.
As I regularly drilled into my students, the most critical aspect of crisis management is recognizing where its true roots lie. Although it has not been politically expedient for Washington to recognize that our economic plight is ultimately held hostage to the housing problem, investors get it. As one portfolio manager recently told me, "If you figure out housing, you've figured out the whole financial market."
Stephen A. Myrow is managing director and chief operating officer of ACG Analytics, Inc., an independent investment research firm that provides public policy analysis to institutional investors. He previously served as chief of staff to the deputy secretary of the Treasury from March 2008 to January 2009 and taught crisis management at Johns Hopkins University's School of Advanced International Studies.