Busch: Time for a Bold Move to Save Housing

According to CQ, Jacob J. Lew, President Obama’s nominee as new director of the Office of Management and Budget (OMB) said that, "The current Democratic strategy of spending to create jobs and boost the economic recovery is the correct course of action now."

This was supported yesterday by 300 economists who signed a letter stating that the Obama administration should not engage in any austerity programs due to the weak economy.

Thursday on CNBC, I debated thiswith the author of the letter Robert Kuttner of the American Prospect. While I greatly respect Dr. Kuttner, I have to say his letter was disappointing as they advocated more stimulus spending for job creation.

Of course, this is the Krugman argument: the stimulus program didn't work because it wasn't big enough. As the WSJ recently pointed out, Dr. Krugman originally thought $600 bln would've been sufficient. Ultimately, government stimulus is about what you decide to spend the money on and clearly the choices made were not the most efficient. Infrastructure spending or the famous "Shovel Ready" spending turned out to be slow and unable to find enough projects quickly enough to have the desired effect.

This is what is encouraging about the change in the Obama administration's policies towards business last week.

If this keeps up, this will help create a positive narrative for the markets and for employment.

However, this won't be enough.

Whether it's President Obama or Republican leadership, someone has to act boldly to stabilize the housing market. (You can read more here for one strategy I wrote about on September 1st.)

The increase in mortgage delinquencies and high level of foreclosures and the subsequent likely downward pressure on home prices should mean the housing market will not reach it's trough until the first half of 2011.

This means that overall credit will remain constrained and specifically bank credit for small business.

This means job growth will remain below levels necessary to keep unemployment below 10%.

While the negative summer market narrative has changed for now, it will take a change in housing to fully reverse. If nothing is done, I expect the current Risk-On theme to deflate by mid-November.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.