During a conference call today, former Secretary of Labor Robert Reich explained vanishing consumer demand:

One big reason we are in the crisis we are in, apart from the meltdown from financial markets, is that consumers have run out of money. Consumer spending accounts for about 70% of this economy, and after the housing bubble burst, consumers were back to where they were before the housing bubble, which was not a very happy place. [...] The bursting of the housing bubble really cut off the last coping mechanism that many consumers had, and that was going into debt. If they can’t borrow any more and have to rely on their sinking wages, the entire economy is in trouble, because there’s just simply not enough demand out there.

One of the problems stunting the economy is that business capacity “far outstrips demand,” meaning that businesses currently have the capability to produce a lot more than consumers are willing to buy. “There is over-capacity in everything,” said Richard Yamarone, chief economist at Argus Research. “If capacity is too large, you don’t need that many people employed, which is another reason we’re seeing such high job losses.”

So how did this imbalance come about? It is partly a result of the current economic circumstances: “Consumers are slashing their spending because they’re perilously in debt and worried about keeping their jobs.” However, for years there has also been a general decline in wages as they relate to productivity:

If American workers were rewarded for 100 percent of their increases in labor productivity between 1980 and 2008 — as they were during the middle part of the 20th century — average wages would be $28.53 per hour — 42.7 percent higher than the average real wage in 2008.

As the Economic Policy Institute pointed out, “of the 20 richest countries tracked by the U.S. Bureau of Labor Statistics, the United States ranks 17th in hourly pay for production workers in manufacturing.” Of the 16 countries ranked higher in wages only one (Ireland) is more productive.

One way to correct this imbalance is increased unionization. As David Madland and Karla Walter found, “if unionization rates were the same now as they were in 1983 and the current union wage premium remained constant, new union workers would earn an estimated $49 billion more in wages and salaries per year.” That’s $49 billion in demand that the economy could desperately use right now.

Today, the Obama administration unveiled its plan to address the housing crisis. The Homeowner Affordability and Stability Plan aims to “help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure,” thus halting the ever-increasing number of foreclosed upon properties dragging down home values for entire neighborhoods. It consists of two separate programs:

One program is aimed at 4 million to 5 million homeowners struggling with loans owned or guaranteed by Fannie Mae or Freddie Mac to help them refinance their mortgages through the two institutions.

A separate program would potentially help 3 million to 4 million homeowners by allowing them to modify their mortgages to lower monthly interest rates through any participating lender. Under this plan, the lender would voluntarily lower the interest rate, and the government would provide subsidies to the lender.

This plan’s mere existence is refreshing, as the Bush administration over and over avoided addressing the housing crisis with anything stronger than a purely voluntary program for lenders, without incentives or requirements. Under Bush’s major housing initiative, Hope Now, “lenders remain difficult to contact and often only agree to loan modifications that are unaffordable for the borrowers, who quickly end up delinquent again.”

Departing from the Bush model, the Obama administration plans to actively fund mortgage modifications, bringing down mortgage payments to 31 percent of income; servicers will receive “$1,000 for each successful modification, as well as additional government funding for each month the borrower stays current on its loan.” Also, somewhat buried in the plan is a provision stating that any financial institution receiving TARP money “will be required to implement loan modification plans.” These requirements and incentives should pull lenders in.

While most of the plan can be implemented using the authorities under TARP II and by allowing Fannie Mae and Freddie Mac to shoulder a lot of the refinancing burden, there is one facet that needs Congressional approval: changing a bankruptcy law to allow judges to “cram-down” mortgage payments for troubled homeowners. To this end, Lee Fang over at ThinkProgress asks an important question of conservatives who criticized the lack of housing provisions in the economic stimulus package: “Were Republicans using the housing provisions as a cudgel to simply stall and defeat the recovery package? Or are they genuinely interested in solving the problems with the housing market?”

Indeed, conservatives now have an opportunity to help advance a comprehensive solution to the very problem they claimed was being ignored. But will they balk at adding the final piece to the puzzle, for fear of bankers’ wrath? Stay tuned.

Earlier this month, we noted that investments made under the Troubled Asset Relief Program (TARP) are “in the money” just 4.6 percent of the time.

Today, The Hill points to a new study showing that the monetary losses of these investments since October total $86.5 billion:

The U.S. government has lost $86.5 billion in the stock market since the end of October courtesy of the Wall Street bailout, according to the nonpartisan research think tank Ethisphere. The worst performer for the government was U.S. Bancorp; the U.S. lost $3.7 billion in the preferred stock that company gave it in exchange for an injection of $6.6 billion through the Capital Purchase Program (CPP). That’s a loss of 56.1 percent, according to Ethisphere.

Clearly, former Treasury Secretary Henry Paulson’s TARP plan has not worked, as the investments have tanked and the largest banks actually “reduced the availability of money for consumers and businesses during the final months of 2008.” Hopefully the new plan being crafted by Treasury Secretary Tim Geithner provides something more tangible in return for taxpayer investments.