The latest series of “Ripple Effect,” the Wharton School’s faculty research podcast, explores finance and markets, with experts discussing investing, recessions, interest rates, and real estate. Titled “The Economy and You,” the four episodes feature Wharton experts whose research covers the housing market, public policy, the possibility of recession, and the Federal Reserve.
In “Is the real estate market going to crash?,” real estate professor Benjamin Keys evaluates the U.S. housing market, which he says is in a deep freeze right now.
“I think we’re going to see a lot of scrambling on the part of mortgage lenders, brokers, and Realtors to try to find some ways to juice volume from this incredible low point,” he says. “And this is the challenge. The housing market is in a deep freeze because interest rates have risen so quickly. The rising rates have reduced demand, as buyers are going to be facing much larger monthly payments, and it has sharply reduced inventory. Few people want to sell their homes.”
Can the housing sector innovate? “The innovation process in the housing market is extremely slow,” Keys says. “If you think about the different margins along which you could innovate, mortgage contract design is one where there’s been a lot of discussion. In the aftermath of the foreclosure crisis in particular, there was a lot of concern among policymakers and academics: Could we design a better mortgage contract that helped people on the down side and avoided those kinds of costly foreclosure sales?”
In “How economic modeling can identify trends,” Kent Smetters talks about the Penn Wharton Budget Model, a nonpartisan, research-based initiative that analyzes the fiscal impact of federal public policy.
Smetters describes the origin of the Penn Wharton Budget Model: “[Members of Congress] wanted analysis at the very beginning, while they’re actually writing legislation. They wanted to know what was the effects before they put their reputation on the line. What’s the effect on the budget? What’s the effect on the economy? What’s the effect on people? And that’s really how we operate very differently. We do a lot of analysis directly with policymakers on both sides of the aisle who just are looking for an understanding of the impact of their legislation before they put pen to paper, before they put their reputation on the line.”
“If you look at the infrastructure bill that was passed a couple of years ago, and then last year, the Inflation Reduction Act, our analysis really played a key role in those legislations,” he says. “Both sides of the aisle said our analysis was pivotal for their members.”
“How economic modeling can identify trends” features finance professor Nikolai Roussanov weighing in on the possibility of a U.S. recession.
Roussanov begins by highlighting the signs of a recession. “Talking about recession when labor force participation is rising seems strange, on the one hand. On the other hand, there is all this talk of a recession. Why? Well, because the Fed is raising rates. … The signs of an economic slowdown are really, really tiny compared to the signs of a healthy economy chugging along. Of course, the markets get jitters every time that they think the Fed is going to tighten more than has been previously expected. And yes, there may be some pockets of weakness here and there. Talks of a commercial real estate collapse are quite active. But so far, the key indicators of a recessionary environment that have to do at least with the labor market are not there.”
And “What role should the federal reserve play in the economy?” features Christina Parajon Skinner demystifying the Federal Reserve, one of the most influential and important institutions in the global economy.
“Fed policy touches our everyday lives,” says Parajon Skinner. “Congress gave the Fed the job of pursuing price stability. That means watching out for inflation. Inflation is generally very bad for economies. It’s very bad for societies because it’s reducing the purchasing power of money, so it’s undermining our wealth. It’s making people’s real wages lower so that it’s harder for them to pay for goods and services. It’s hard for businesses to plan. This really drags the economy down.”
“The second thing to note in terms of how Fed policy affects people’s everyday lives is that the Fed really takes its job seriously of stepping in during economic shocks to provide liquidity for the financial system,” she says. “This really matters for everyday people because if the financial system freezes up, this severely impacts the rest of the economy, trickles down to households and businesses.”
For a full list of podcast episodes, visit the “Ripple Effect” website.
