Tony Fratto: Ready for a New Decade? Not so Fast.
Much of the media has arbitrarily determined that the decade of the "aughts" is over, asserting that the twenty-teens have begun. Decades, by definition, are ten-year periods, and since there was no year "zero", decade-counting must begin with year one, so 2011 will actually kick-off the next decade.
While there's probably no stopping the publication of decadist retrospectives and Best-of lists, the "aughts" (is there a more awful moniker?) aren't over for the US economy. Fun with calendars aside, 2010 will be notable not for the fresh start of a new, clean-slate decade, but rather for dealing with the delayed and lingering effects of the current decade, and finally exiting the economic policies that addressed the financial crisis.
In fact, in 2009 -- the year many are calling the last of the decade -- almost nothing was resolved to mark the end of the most recent economic era. Here's list of unfinished economic issues we'll work through in 2010 before leaping into a new decade:
1. The Federal Reserve's Path to 'Normal'. The Fed is still executing strategies to address the financial crisis, and has only begun a long process of withdrawing extraordinary programs. In March, the central bank will stop purchasing mortgage securities, but other programs remain, and securities the Fed purchased will remain on its balance sheets for some time. And monetary easing, with the policy rate set at zero, may begin to reverse in 2010, but a return to 'normal' rates is a long way off. Most analysts don't expect the Fed to begin to drain liquidity until late in the year.
2. The Housing Drag. The multi-year downturn in housing prices and increase in foreclosures will continue to be a major drag on the economy in 2010. While home prices may have reached a bottom, homeowners will likely remain underwater on their mortgages for years. And, as I warned when the program was announced, the Obama Administration's efforts to prevent defaults is failing, and mortgage foreclosures will continue largely unabated this year. Rising mortgage interest rates and continued elevated unemployment in 2010 will act to delay a housing rebound.
3. Reforming the Financial System. While it's not unusual for a new President to lay out an ambitious agenda in his first year, raising expectations that reforming the system of oversight and supervision of the financial system could be accomplished in 2009 was a reach. As policy makers on Capitol Hill, within the Administration, and in international bodies are coming to realize, the issues are complex are require time to address. Also, while big banks have repaid the government's investments, the vast majority of banks receiving capital injections will still have that goal in 2010.
The House has passed its version of reform; the Senate is making progress; but this priority of the current decade won't be resolved until later this year. And because achieving standards for capital levels, accounting standards, liquidity, and leverage are necessarily global, it will be years before financial reform can be complete.
Furthermore, all those toxic assets, primarily mortgage-backed securities, remain in the financial system. Efforts by both the Bush and Obama Administrations failed to remove these assets from the system.
Finally, what to do with two major contributors to the financial crisis - Fannie Mae and Freddie Mac - will only begin to be addressed in 2010. Rather than paying out a plan to resolve them, the US Treasury in a Christmas eve announcement moved to lift all caps on taxpayer backing of the two agencies.
4. Domestic Policy Uncertainty Delays Hiring. Of President Obama's two main domestic policy initiatives - health care and climate legislation - neither were accomplished in 2009. Health care spending legislation may be passed early in 2010, but implementation (owing to budget gimmicks) will take years, as will the bureaucracy's efforts to promulgate a tsunami of new rules.
After the Copenhagen summit debacle, all bets are off on climate change legislation and the White House's goal to create a system forcing consumers to pay for carbon usage. In the mean time, the Environmental Protection Agency is proceeding on its own, separate path to force Americans to pay for their carbon emissions.
Uncertainty over the future of these two unfinished policies is depressing hiring among businesses small and large as they try to anticipate the impact on bottom lines, and 2010 will see businesses still seeking clarity.
5. The Credit Crunch Remains. The financial crisis was characterized by a breakdown in confidence, severely damaging the financial system's capacity and willingness to extend credit. Some confidence has returned, and credit has thawed a bit, but we're a far cry from the wide availability of the US economy had become accustomed to. Demands on banks for higher levels and quality of capital also limit the availability of credit to many consumers and businesses.
It also remains unclear whether Americans will ever again approach their previous appetites for credit even when it does become available. Households, shocked by the crisis, are saving more and borrowing less. This may be good for the long-term health of our economy, but a permanent change in household borrowing habits will have consequences for economic growth. This question isn't yet answerable in 2009, but it may be by then end of this year.
6. Debt and Deficits. The current fiscal year 2010 budget is in the books, and so through October we'll be dealing with last year's fiscal decisions (and we'll be paying for them a lot longer). This year we'll be debating the budget for the 2011 fiscal year, and President Obama will present his budget proposal in early February. So from a fiscal standpoint, we're fully entrenched in the first decade of the 21st century, not the second.
The Administration needs to present a credible plan for deficit reduction - not one relying on the rosy predictions that characterized the President's stimulus bill last year. Market participants, foreign investors, inflation hawks, currency traders and gold bugs, will make judgments as to the credibility of deficit reduction plans. And everyone will look for the mix of policies to achieve smaller deficits: if lower spending, from where?; if tax increases, for whom? Tax and spend decisions will be hotly debated this year, but we won't live with the consequences until next year (the first year of the new decade).
Lastly, 2010 will also be notable for putting off - and even worsening - the big crises for the Twenty-teens decade: the fate of entitlement programs for older Americans, Social Security and Medicare. Difficult decisions on these critical programs will be put off again, for the next decade, and the next economic era.
Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.