Recovery in 2010? Krugman sees huge price declines in L.A.

Catching up on weekend reading: The Fortune magazine interview from last month with economist and columnist Paul Krugman is worth reading for its matter-of-fact pessimism. Highlights:

--Krugman sees housing prices falling by 25% "overall" and worse here: "In places like Miami or Los Angeles, you could be looking at 40% or 50% declines."

--Krugman sees economic recovery, as defined by job growth, coming in summer 2010 -- at the soonest: "But I wouldn't be surprised if it goes longer than that -- maybe into 2011."

--He sees a good chance the Fed will reduce interest rates to zero. (Not a typo.)

--Lastly, he favors public investments to revive the economy. This is not surprising given Krugman's general political leanings, but his reasoning is worth noting. "... Since this thing is going to go on for a long time, effectiveness is more crucial than speed. I'm actually for public investment now -- repairing bridges, building infrastructure. Normally people say if you try to do any public investment to stimulate the economy, the recession will be over before it can come online. But I don't think that's a problem this time."

Economist Stephen Roach made a similar argument a few weeks ago, and I tend to agree with it. Instead of focusing on "putting a floor" under housing prices, government should focus on public works projects. I know a large city of 10 million people or so that could use a decent public transportation system.

Here's a prediction: By election day, the economic argument will no longer be focused on how best to help homeowners avoid foreclosure but instead on what kind of major stimulus efforts are needed. Expect the Democratic nominee to embrace Krugman's logic.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.

Comments

[jja_American]

We could get rid of 10,000,000 illegal nationals from around the globe living here in USA..or even 20,000,000, I am serious, too..

[NJC]

Public works and even housing investments should be done.

It is past time to have Iraq use their oil reserves money to finance the security they are asking for. There is no reason that the paying public should continue to foot the bill for that war without having the gov. reinvest in DOMESTIC policies, infrastructure, housing, education and health other worthwhile investmetnts.

Development is good when a majority benefits and the quality of life is improved.

Public works of all kinds are a good idea.

[IToldu2CashOut]

I've been reading Paul Krugman for about 9 years and I can tell you just about everything he predicts comes true. A few years back he was the first to predict a housing meltdown and call for action to prevent it from getting any worse. Dismiss him at your own peril. I've never seen any commentator predict the future like this guy. If you don't believe me check out the archive of his columns in the NYtimes.

[Geek Seek]

Get the shovels and pitchforks ready. We've got some rebuilding to do. But as we build, let's pay attention to how we're financing all the activity. Check out this bloomberg article from a few months ago. White Knight JP Morgan, who saved our economy at the behest of the guvment by bailing out Bear Stearns? Well look what they were up to... this is really sick. Really really sick.

http://tinyurl.com/2gfkes

[left of lefty]

i would vote for building out the metro rail system. first step is to cover all the major employment centers, i.e. finish the gold line all the way to the santa monica pier, extend the purple line west to at least century city and ucla and preferably joining the gold line in santa monica.

there also needs to be a large 'wheel' around all the spokes, so people commuting from van nuys to santa monica don't have to go through downtown.

then we need smaller 'loop' systems in each of the major neighborhoods -- san fernando and san gabriel valleys, the south bay, south central, and the west side. these local loops should cover the major employment, shopping and entertainment centers in the area.

finally, orange county has to be hooked into the system beyond just the metrolink. people should be able to go from long beach to newport beach without having to go through downtown and santa ana.

with a better metro rail system that people can actually use, we won't need to spend as much money expanding and fixing the freeways and bridges. we'll also take more cars off the road and be better for the environment. most importantly, people can live further away from work without as much of a finacial and lifestyle strain, which will better equalize home prices throughout los angeles.

oh, here's one thing that the mta can do that will immediately boost ridership -- provide free wifi on all buses, trains, and stations. i personally will take public transportation if that happens, even though it'll cost me an extra two hours and $5 a day. because i will be productive for 2 hours 40 minutes on my commute, versus a wasted 40 minutes sitting in traffic.

[Inland Empire]

A $60,000K public works project to bring the Southland a state-of-the-art transit system might be a good investment long-term and prevent a deep recession.

Hmmm? Did you mean to add quite a few more zeroes to that number or would they hire undocumented workers to arrive at this bargain price?

[aaron donahue]

I see a vast sea of empty homes with signs in front of them, a long winter of vacancy.
Spring, with improved sales with come in may/june 2011.
But not before the economy falls off the top of pikes peak and plunges to the abyss below---I am afraid.

Psychic and Prophet
Aaron C. Donahue
(check out myspace predictions )

[Louise Jones]

It will never happen.

[Michael Hoskinson]

As evidenced by his last appearance on "Meet the Press" Paul Krugman is a far left liberal looney that people should pay no attention to. It saddens me that someone of his extreme leanings has a voice today, we don't need people like him positing their crazy ideas in times like these.

[Ragnar]

"Public works projects were one of the more effective New Deal tools. And considering that we've got a confluence of teetering economy and crumbling infrastructure, public works is a perfect fit.

But we've got a president who is a moron, so he'd rather give us money and ask us to buy jet skis instead."

Posted by: NoWayinLA | April 06, 2008 at 09:28 PM

Well said, NoWayinLA! Investing in infrastructure, especially energy effieciency and serurity are wins for everyone.

What are my wife and I going to do with our $1,200? Put it in a bank account and save it for a downpayment on our next home. Even if the account is getting an interest rate of only 2%, that is still better than putting it into our next home now and having that rate of return be negative.

Oh, and George W., you can only ride a jet ski for about five months in WI. What would I do with it for the other seven?

[bulwark]

Regarding the "Who should get mortgage aid" article today the answer is NO ONE. No borrowers deserve to have their loans paid by taxpayers. Responsible citizens saved their money and didn't borrow what they couldn't repay. How dare Barney Frank tax our precious savings!

[Laker]

"Who should get mortgage aid? "

I say everyone should get bailout provided that Frank and Dodd pay for it using their own bank account. I'm sure there is plenty of cash there which was transfered from the NAHB and NAR to them with direct deposit....

[mbob]

All the Coulter quoters may leave now. The bile blogs await your arrival.
Until the atrocity in Iraq ceases, we are all, how is it you heepsters say, boned?
2013 is the graphed out re-confluence of "normal" housing appreciation and the out-wringing of several TRILLION worth of imputed housing value.
WPA redux would be a good start. How about our long despised monorail system? God forbid it should work in vegas and not here.
Oh, and the middle class needs to re-emerge.

[E]

The only reason Michael Hoskinson doth protest so loudly is because.....

he appears to own multiple properties all over the place.

HA-HA!

[somedude]

Anything is better than a govt program to prop up the housing prices.

I vote for expanding the gold line!

[Uncle Billy Climbs Mont Pelerin]

Pete,

Regarding financing of schools and other infrastructure: Do you know if any of the "swaps" financing deals were being done here in Southern California by our schools or other government agencies like they were in Penn. and many other places?

From what I understand, this is to public finance as toxic subprime cash out refi's were to homeowners. Cash strapped schools, museums, etc., are told by their trusted "advisors" that they can get a nice lump sum up front and then use of funds they desperately need.

Maybe you could ring up Kathleen Brown (ex director at Countrywide) and ask her? Did Goldman Sachs do any of this predatory lending to our municipalities and schools? Did anyone else? Per the Bloomberg article quoted above (or rather the video link), this has been totally unregulated since 2000. She would be a good person to ask as she's head of West Coast Municipal Finance at Goldman Sachs. Who else would know? Let's ask the Mayor's office and the County Board of supervisors as well.

Not directly a housing issue, but certainly relates.

[Expat]

Nonsense.

The solution to the housing bubble collapse is to demolish all abandoned and unsold homes. This will reduce the supply, driving up the prices of occupied homes.

The same system should also be applied to unemployment.

[Yoski]

Use the bailout money to build more prisons so we have places where we can put all the borrowers, brokers, appraisers and bankers that comitted the fraud.

[Tommy]

Public transportation in Los Angeles? Pishaw! I just got back from London and those guys have a public transportation system.

When you arrive there, it looks like a complete mess...like a 4th grader designed the system as there are about 10 subway lines that intersect at just about every station and buses above ground to cover the route. Then you realize that this is exactly why the system works. People can get point to point within 20 minutes no matter where they start. No looking for parking, no getting stuck in traffic. Subway too crowded (yes they are that successful eventhough they charge $8 each ride!)? Take the bus...you get nice city views and since gas is $9 a gallon there, who the heck is gonna drive so you rarely get stuck in traffic except in pedestrian heavy areas like Oxford or Picadilly Circus.

You see, London is a city designed around walking and public transportation. That decision was made for them long before cars were around in fact...they built very narrow roads and are stuck with them. LA is built around the car. To cover the area that LA county spans with a system like London we'd need roughly 200 subway lines, several thousand stations, 10 times the number of bus routes we have. Each ride would have to cost $15 to cover maintenance! I don't think LA has that kind of cash on hand...and if they did, you wouldn't see anything close to what is really needed in our life times.

[Justin]

While we're discussing public works: How about we get that California High Speed Rail system under way? Talk about a public works project that will bring great benefit! Employment for thousands both during construction and in revenue service, reduced congestion at our airports and reliance on a terribly run industry that shows zero regard for its customers, environmental benefits from rail travel (which is 15x less polluting than air travel), the list goes on and on.

Frankly, it is an embarassment that this system is not already in place. Let the Governor know that we can't all afford to fly between Sacto and LA every day on a private jet!

[Anonymous Coward, LA]

The housing criss is just part of the lager reality of a rotten core to our economy created by those who loot rather than produce. We are facing a real problem since we now compete on the world market for food we grow here in the USA since most food producers are international. This means they could care less about the United States and like the international wealthy their profits have no relationship to the success or failure of the USA. They say inflation of food and fuel is a product of the housing crisis. Don't believe them they are only trying to protect their wealth. Time has come to take away their wreath since the means that they used to generate their wealth has hurt the people of the United States. It is time for class warfare and it is time to elect Democrats. If the wealthy think that they will get away Scott free from looting the assets of the USA they are in for a very rude awaking. Let them go to Dubai with their kind we don't need them.

[Irv]

All of this "equity" we have here in California is just an illusion anyway! None of these homes is worth anywhere near what they are listed for. We are living in one of the worst hazard zones on earth where the earth could shake us to pieces at any moment, fires can creep up on us in the middle of the night, mud slides could bury us while we sleep, and air pollution is considerably shortening all of our lives. Not to mention that even a mild undersea earthquake in the Pacific could generate a Tsunami that would wipe out all of our "desirable" coastal communities in a heartbeat! These overvalued home prices were all an illusion that had to eventually meet reality anyway.

[JohnnyB]

How about developing an 21st century integrated traffic light control system that actually works in greater LA!

[Sharon]

"As evidenced by his last appearance on "Meet the Press" Paul Krugman is a far left liberal looney that people should pay no attention to. It saddens me that someone of his extreme leanings has a voice today, we don't need people like him positing their crazy ideas in times like these."

The last time I looked this was America, a place that supposedly we should be able to hear all views whether we agree with them or not. BTW most of what I hear on TV, is the rant of people voicing crazy ideas and most of them are from conservative leaning voices.

[Guy Fox]

What Los Angeles really needs to bring down the cost of living out there... is another riot. Or better yet... a 10.5+ earthquake where the Harbor Freeway traverses the Santa Monica Freeway. A twenty megaton bomb detonated on $unset Boulevard would also help to bring down the cost of living in Los Angeles, the soidisant "City of the Angels."