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Originally published Saturday, June 4, 2011 at 10:02 PM

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Jon Talton

Creating productive jobs the way out of Great Recession

The most arresting piece of the Standard & Poor's/Case-Shiller index report last week was that house prices have fallen further than during the Great Depression, when they took 19 years to recover their losses.

Special to The Seattle Times

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The causes of the Great Depression are still debated. Aside from arguments about the relative shares of blame, the roots of the Great Recession are well known.

Stoked by years of easy credit from the Federal Reserve, the banking industry and Wall Street created a classic, if historic, bubble, which popped.

Mortgages were the kindling. They were bundled into wildly profitable securities and exotic derivatives sold and resold to investors. No small amount of fraud was involved, abetted by the 1999 deregulation of financial services, including the repeal of Depression-era laws designed to avert just such a calamity.

With the exception of Washington Mutual, most big players behind the collapse are doing better than ever, thanks to your tax dollars and the implicit promise of the federal government to bail them out again. Dodgy swindles have barely hit a speed bump from the tepid Dodd-Frank legislation.

But the other fountainhead of the Great Recession was the housing bubble and bust, joined at the hip with the financial profligacy, but with its own distinct features. It's not back. Indeed, it keeps getting worse.

Last Tuesday, the Standard & Poor's/Case-Shiller index showed that housing prices in all but two of the 20 major metro areas it tracks hit new post-bubble lows in March. It signaled a double-dip for the housing sector, where prices have fallen eight straight months.

With prices in most places back to 2002 levels, it has wiped out nearly a decade's worth of equity for owners.

The exceptions were Washington, D.C., and Seattle, showing modest month-to-month growth. D.C. benefits from federal spending and Seattle, so far, from a diverse, mending economy. For the most part, our metro area avoided the overbuilding that plagues so many others, although Pierce County and some other parts of the region continue to suffer.

The most arresting piece of the report was that house prices have fallen further than during the Great Depression, when they took 19 years to recover their losses.

The difference is the U.S. in the 1930s was a manufacturing and petroleum superpower facing deflation and underutilized capacity. World War II and the postwar boom fixed that. By the mid-2000s, the U.S. economy was housing to a historic degree. It was our last big factory that couldn't be sent to Mexico or China.

I was writing columns warning about the dangers of a housing bubble in the mid-2000s. That did not endear me to many readers of the newspaper in Phoenix, where an estimated one in three jobs was dependent on the housing sector. This was an extreme case, but one seen across the Sun Belt and to a lesser degree throughout America.

Indeed, even in Washington state, the biggest segment of job losses has come in construction, much of it in residential building. Loss of construction fees are hurting government revenues.

As I've written before, the old housing machine is not coming back soon. There are too many empty houses, too large an inventory of bank-owned properties and too much debt. We are a poorer nation after the Great Recession, unemployment remains high and ownership is out of reach for millions.

Unfortunately, the Great Reset that urbanist Richard Florida predicted would emerge from the collapse of an unsustainable housing bubble hasn't materialized. Florida has cautioned that such changes can take a generation. In the meantime, we're stuck.

The housing collapse is a huge drag on an economy already facing slow growth. It is a major component of unemployment.

For many homeowners, rising equity made up for stagnant wages in the 2000s. Now they've lost that, and many owe more on their houses than they can fetch on the market. All this bleeds into consumer spending and confidence.

America desperately needs to make this reset.

More infrastructure spending could help unemployed construction workers, and the right projects would return their investment over time by helping to move people and goods and enhance productivity.

New incentives on Wall Street could get the big banks and hedge funds to invest in productive, job-creating and innovative industries rather than depending on trading and mergers for big profits.

Better job retraining could move people who once worked on framing crews or in mortgage boiler rooms into areas needing highly skilled employees. Advanced niche manufacturing is only one example.

And, the American dream needs to be recovered from its hijacking by the housing industry as the name for a consumer product. Not everyone should own a house or a condo.

Florida points out that renters are more mobile, better able to relocate for job opportunities. Economist Dambisa Moyo, who rightly criticizes government incentives for homeownership, says people might do better investing in other assets than housing.

None of this is what the big production builders want to hear. But even they won't heal until America recovers a diversified economy and fixes the unemployment crisis. No jobs, no buyers.

None of this is likely to happen. No leaders are pushing for infrastructure spending, citing high federal debt. The big banks like the profitable status quo. As for the rest of us, the policies are lacking to grow the economy, which would most address the debt.

So we're about to find out how far down the mountain the housing crisis can crash, and how much more of the economy it takes with it.

You may reach Jon Talton at jtalton@seattletimes.com

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About Jon Talton

Jon Talton comments on economic trends and turning points, putting them into context with people, place and the environment in the Pacific Northwest
jtalton@seattletimes.com

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