Monday’s morning lecture series speaker John Koskinen quoted Winston Churchill in saying, “You can always count on Americans to do the right thing — after they’ve tried everything else.”
Koskinen, non-executive chairman of Freddie Mac, said during his lecture at 10:45 a.m. Monday in the Amphitheater that rethinking the housing market, immigration and education can pull the U.S. from its economical hole. He was the first speaker in this week’s topic on “The U.S. Economy: Beyond a Quick Fix.”
Sherra Babcock, director the Department of Education and moderator for Monday’s lecture, said the week’s theme was chosen, like every theme, 18 months ago. She knew, even then, that the U.S. would not have recovered from the recession — hence the Week Seven theme.
“Everyone knows we’re in the middle of the worst economic downturn in 80 years. What’s surprised us is how long it’s taken to recover,” Koskinen said. “The combination of a slow recovery and a deficit growing to unmanageable levels, coupled with an inability or unwillingness to solve either problem, has caused many Americans to worry about our future.”
The housing market
Since as far back as 1959, housing has supplied about 16 percent of the U.S. gross national product. It peaked at 19 percent in 2006 but is down to 15 percent as of 2011.
Koskinen said housing has “typically led financial recovery”; however, housing lead the financial recession this time.
The housing market drew investors in 1999 as housing prices began to rise faster than incomes. As the prices increased, so did demand for housing; thus, mortgage securities became more and more popular, Koskinen said.
“The theory, or at least the assumption, was that any delinquencies would result in little or no loss since the house could always be sold for more than the mortgage,” he said. “With prices escalating, housing had now also become a high-return investment for owners, rather than a vehicle for savings.”
As demand increased, so did the need for people to buy those houses. As a result, people applied for loans after loans. Following that, home equity loans came into play. This allowed homeowners to “treat your home like an ATM.”
The problem here was that this expanding market wasn’t going to last. In the middle of a bubble, he said, nobody is ever sure whether it’s a bubble or economic progress.
This time, it was indeed a bubble.
“It was great fun while it lasted,” Koskinen said, “and then it stopped.”
Between 2005 and 2009, housing wealth fell 30 percent — an annual $240 billion. This fall is partly to blame, he said, for the country’s struggling economic recovery.
The solution to this aspect of the economy, he said, lies in supplying tax incentives for home ownership and providing government guarantees to securities provided by Freddie Mac and Fannie Mae.
Covered bonds are another alternative; they’re currently being used in Europe to solve similar problems. However, he said the funds generated by bonds never have reached a magnitude as great as the current U.S. deficit.
Others say “winding down” Freddie Mac and Fannie Mae before the economic slump would have avoided the recession. Koskinen disagreed, though he did agree that the dominance they have over the mortgage market today is “not good.”
“But even resolving the questions confronting housing won’t be enough to guarantee a vibrant economy,” Koskinen said. “There’s the $14 trillion challenge of the deficit growing as we speak.”
Government spending makes up about 20 percent of the U.S. global domestic product; however, it makes up about 37 percent of the deficit. He said that government spending is important in today’s economy, but spending needs to slow down.
Population growth and education
Today, the population growth of the U.S. is greater than that of China, India, Mexico and Brazil. Koskinen said legal immigration is important to this growth. Over the past two decades, immigration has exceeded last century’s great wave of immigration.
In countries like Japan and Italy, where young people are emigrating, the population is both shrinking and aging. This leaves fewer young people to join the workforce and to innovate. Thus, economic growth begins to falter.
Perhaps the most obvious source of population growth is childbearing. From the 1980s to the 1990s, members of the baby boomer generation began to have children of their own, resulting in another large wave of population growth. Though this generation has many names, Koskinen referred to them as echo boomers.
Furthermore, Koskinen said as immigrants and echo boomers begin to live on their own, the result is a greater demand for housing. As detailed earlier, this could help to restabilize the U.S. economy.
And with a greater population also comes a greater need for education.
Foreign students make up 27 percent of doctoral graduates in the U.S. Koskinen said many of these students opt to remain in the U.S., thus providing productivity to the U.S., as opposed to their home nations.
However, since the 9/11 attacks, the U.S. has made it tougher for students to study and to remain within the borders. Fear of terrorism is hindering economic growth, he said.
There still are American students who study in colleges and who provide to the U.S. economy. The problem here, he said, is student loans.
“Today’s challenges require us to value and support education more than ever,” Koskinen said. “The irony is that as education becomes more important, we are more challenged to provide it.”
Tuition costs are increasing faster than inflation, making some students unable to afford college educations. If the trends remain the same, he said, the cost of private school education will double by 2020.
He said these changes are clear to him in the struggle to rebuild the U.S. economy.
“Increasingly, it’s not a question of what we need to do (to recover economically),” Koskinen said, “but whether we have the will to do it, and (whether we have) the patience and understanding to deal with the time it’s going to take.”
John A. Koskinen
John A. Koskinen is non-executive chairman of the Federal Home Loan
Mortgage Corporation, or Freddie Mac. He has served in this position
since September 2008, save for a stint as Freddie Mac’s interim chief
executive officer from March to August 2009. Koskinen was assistant to
the president and chair of the President’s Council on Year 2000
Conversion from 1998 to 2000, and deputy director for management of the
White House Office of Management and Budget from 1994 to 1997.
Koskinen previously served as president of the United States Soccer
Foundation, and as deputy mayor and city administrator of Washington,
D.C., from 2000 to 2003. He also worked as a senior executive of The
Palmieri Company, including serving as president and chief executive
officer. During his 21 years with Palmieri, Koskinen helped reorganize
the Penn Central Transportation Company; Levitt and Sons, Inc.; the
Teamsters Pension Fund; and Mutual Benefit Life Insurance Company, at
the time the largest failed life insurance company in U.S. history.
A director of the AES Corporation and American Capital, Ltd., Koskinen
formerly was chairman of the board of trustees of Duke University, his
alma mater. He also graduated from Yale Law School with an LL.B, and did
postgraduate work in international law at Cambridge University in