Abstract In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, de‡ationary outcome within the next several years. To frame the discussion, I rely on an analysis that emphasizes two possible long-run outcomes (steady states) for the economy, one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, de‡ationary regime observed in Japan during the same period. The data I consider seem to be quite consistent with the two steady state possibilities. I describe and critique seven stories that are told in monetary policy circles re- garding this analysis. I emphasize two main conclusions: (1) The FOMC’s extended period language may be increasing the probabil- ity of a Japanese-style outcome for the U.S., and (2) on balance, the U.S. quantitative easing program o¤ers the best tool to avoid such an outcome.JEL codes: E4, E5.

Seven Faces of Peril Final Jul 28 Bullard 2010

Renters are far less likely to upgrade their homes and participate in neighborhood improvement programs. Consequently, values fall. As values fall more mortgages become underwater and more people effectively become renters (either through foreclosure or because they owe more to the bank than what their house is worth).

Homeownership is an important part of a well-developed middle class. Homeownership enables individuals to save and accumulate assets that can benefit generations of their family. Even if the short-term financial cost of rent beats that of homeownership, the long-term benefit of an eventually mortgage-free house is huge.

For those saying that homeownership is what got us into this mess in the first place…I argue that it wasn’t homeownership, it was loose lending standards and rampant speculation that led to the housing bubble and massive excess capacity. If everyone who bought houses over the past few years were properly qualified and had some skin in the game (i.e. a decent down payment) the bubble would be far-less onerous.

On the other hand, those that are buying houses today (in an environment with tighter lending standards, cheaper housing and low mortgage rates) may be the ultimate benefactors of homeownership. Today’s low mortgage rates and cheap housing is setting up families to be debt-free much faster than in the past (and therefore have more money available for savings and discretionary spending). I have suggested several times that if a large portion of the young population exploits today’s ownership opportunity, America could have a far more stable economy in the coming decades.

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