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ATLANTA — A steep recession is typically followed by a steep recovery. So what happened this time? Tom Cunningham, vice president and associate director of research for the Federal Reserve Bank of Atlanta, suggests that financial regulation reform, a lack of consumer confidence, rising oil prices and the European debt crisis have all played a role.

“It has been a very disappointing recovery by the standards of recoveries,” said Cunningham. “If you were relying on [traditional] econometric models to predict the path of the recovery, you were really wrong.”

His comments came Wednesday during the closing session of the Mortgage Bankers Association’s annual commercial/multifamily finance conference in Atlanta.

The uncertainty over financial regulation reform can’t be overstated, said Cunningham. “Problems emerge [after a financial crisis], and it seems like a good time to address the root causes of those problems. But changing the rules of the game in a period when everyone is uncertain in the first place isn’t really conducive to immediate economic growth,” Cunningham said, referring to the Dodd-Frank Wall Street Reform and Consumer Protection Act.

When times are good, there is no incentive to do reforms, and when times are bad, it’s not a good time to do reforms, he continued.

Consumer confidence is another important factor to making a steady recovery, Cunningham stated, because it fuels consumption. According to The Conference Board, the consumer confidence index in January was 61.1, down from 64.8 in December.

“Consumption is 70 percent of the U.S. economy. I used to say that was more than any other economy on the planet, but that’s not true.” Consumption as a percentage of GDP is even higher in Greece, he added.

Standard & Poor's downgrade of U.S. debt this summer didn’t help matters any. “The quarter after the debt ceiling mess, when what seemed to be an arithmetic requirement of the spending process, really became a political disaster,” he said. “That’s not helpful. Restoring confidence is a really big issue.”

Cunningham pointed out one factor that easily derails consumer confidence is a rise in oil prices. Macroeconomist Jim Hamilton, professor of economics at the University of California, studies U.S. recessions, Cunningham said. Hamilton noted that every recession, including the last one, was preceded by an oil spike as well as an additional problem. Oil and financial derivatives were the culprits leading up to the Great Recession.

Hamilton also pointed out that it’s not the high price of oil that matters so much as the spike in price.

“We can live with $100 a barrel oil as long as last month it was $95 a barrel,” Cunningham said. “Where we have a problem is when oil is $100 a barrel today and it was $80 yesterday. You can reallocate resources, reshuffle consumption bundles and make production decisions, but it’s the uneven nature of that price movement that can really be disruptive in the U.S.”

Because some countries in the European Union are economically stronger than others, that poses a challenge for the central bank to adjust its policies to help just one country.

“If everyone is slowing down or speeding up, you can go to the European Central Bank and adjust the policy to promote stability,” Cunningham said. “The problem is if one economy, hypothetically let’s say Germany, is doing very well and another economy, hypothetically let’s say Greece, is not doing well, you can’t go to the central bank and ask for different monetary policies for the different units.”

The issue isn’t about paying off Greek debt, it’s about the larger problem of fiscal coordination, which is a governance problem across the whole Euro Zone. How it is solved is important. The problems in Greece could be fixed by Germany writing the financially beleaguered nation a check. However, Spain and Italy are too big to save. It’s a good idea to get those governance issues worked out before those economies are really stressed, he said.

“It’s a wonderful time to be a macroeconomist,” Cunningham concluded. “The Fed is a whole bunch of people like me who thought we’d never see stuff like this happen and here it is. So it’s a really exciting time for the dismal science.”

— Savannah Duncan

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