Wikinvest Wire

Government should just get out of the way

Friday, March 26, 2010

Well, it looks like many more billions of dollars will be spent to aid the nation's housing market in what is, in large part, an ultimately futile attempt to keep home prices above where the market would like to take them.

Freakishly low interest rates and $8,000 or more in tax credits for homebuyers apparently hasn't done the trick, so the White House today is launching a new program to help homeowners who can't afford to stay in their house by lowering payments through government subsidized financing and, in some cases, reducing mortgage balances.

Not long ago, a commenter here noted the following:

I feel that another leg down is inevitable. I also think the government will try to intervene which may keep us in limbo for longer than necessary. The end could come and we could get back to business in a more stable, albeit lower price level, market if the government would just get out of the way. It is much harder to sell or rent in a market that is still trending downward or where there is a lot of lingering doubt. If we could reach a bottom and have prices stabilize on their own for a few months without any government action, it would become obvious to all that the worst truly is behind us and then all the pent up buying could come back. But as long as the market is being propped up superficially, the skeptics will continue to wait on the sidelines making recovery impossible. We need to bottom and start over so we can develop business models that will work. With the government involved and more bad news waiting in the wings, it is impossible to make long-term plans. The economy will just have to wait until the government gets out of the way, IMHO.
Unfortunately, that doesn't appear to be one of the options now being considered...

While I'm as sympathetic as anyone about a family down on their luck after job losses and a collapsing real estate market, this misplaced notion of the sanctity of homeownership and how people losing their houses to foreclosure is somehow such a terrible tragedy is ultimately doomed to make things much worse than they would otherwise be.

The vital lesson that, apparently, has not yet been learned through previous efforts at bailing out homeowners is that most of these people had no business buying the place in the first place and, while the feeling that "Banks got their bailout so I want mine too" is both understandable and pervasive, it is no reason to make a bad situation even worse.

Caroline Baum has some similar thoughts in today's column at Bloomberg:
Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit.

What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders.

With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy.
Barry Ritholtz also had some thoughts on this, arguing we need more foreclosures, not less:
I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.

It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
Yes folks, this is how you get a "lost decade", by again and again trying to: a) prop up assets that desperately want to return to levels supported by market fundamentals; b) keep insolvent banks solvent; and c) sustaining the misguided belief that a 70 percent homeownership rate is or ever was a desirable goal.

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Greyhair said...

I realize it's not a popular viewpoint on a permabear blog, but there is something to be said for government interventions to ease the economy into a new normal. I think this is more desirable for people's lives. Sure, the economy needs a reset from the past excesses, I'm not sure anyone would dispute that. But it does matter how you go about a reset. To real people, a reset is not an abstract economic principle (like it would be for many who read this blog).

As an investor, recognizing that elected officials have to understand the above concept is important in how you decide to approach the market IMHO, as opposed to carping about how the economy should be fixed.

Tim said...

I suppose one man's "easing the economy into a new normal" is another man's "lost decade"...

Greyhair said...

True. But whatever you call it, there are real people involved who's experiences are not abstract. Personally? I don't think that should be ignored.

Tim said...

What's wrong with helping these people transition to a life of renting again instead of trying to preserve their "homeowner" status, which, when you consider that half of the "permanent" loan mods have back-end debt-to-income ratios of more than 60 percent is really just preserving their status as "debt slaves".

Anonymous said...

The problem with "easing the transition" is that it costs taxpayers quite a bit to do so. Since many taxes are highly regressive (property tax, sales tax, inflation tax), this winds up taking resources from people who can't afford to lose them. Then the resources are redistributed to spendthrift gamblers to bail them out of their foolish gambling debts.

Enough already. Leave the bottom 50% alone, and stop regressively taxing them to bail out leveraged gamblers.

Dan said...

What about folks who want to enter into the market that can't/won't at these price levels and levels of government interference? We're not abstracts, but the clock is ticking on our lives as well and the opportunity costs are going up by the minute. Having to watch these circus acts is not my idea of "easing" into anything. Folks who can't pay should be foreclosed. Banks should take the assets onto their balance sheets and, by virtue of writing them down, fail. These assets will go onto true auction blocks. As the larger, irresponsible banks are broken up. Homes prices, as an asset valuation would fall to where they would become affordable. Low prices = affordability, not government largesse.

Greyhair said...

The vast majority of "taxpayer money" went to institutions, not individuals. Yes, they were "spendthrift gamblers". But to teach them a lesson at the expense of ordinary citizens isn't right either. And yes, I know that greed amongst the masses was an issue too (a hummer anyone?). Thus is human nature without controls in place, which is why we have government in the first place. Philosophically, I don't want to return to the wild wild west days of strictly market forces (which we just tasted). Human nature in these conditions leads to huge disruptions and instability in society.

Tim, the preservation of equity and home ownership is as much for financial institutions and the economy as a whole than individuals. Like it or not, we're all in this mess together. How we get out is the subject at hand, specifically who gets hurt.

I'm sure we'll never agree. Tim, you tend to be a permabear in my opinion. I often agree with you academically. But investing doesn't take place in a classroom based on what "should" happen. It occurs in a real world where (in our country) financial well-being of the mass is the business of government .... like it or not. So investing decisions should be made accordingly.

And with that, I'll sign out of this discussion and let the other permabears have at it!!!


Tim said...

While I lean toward perma-bear, I consider myself a perma-realist which, kind of makes you lean toward the glass-half-empty view of things in the U.S.

Dan said...


I doubt that you'll check into this as the new blog is up now, but just exactly how bad were the days of the "wild wild west strictly market forces" that you refer to? Surprisingly, they were quite tame and more civil than today.

ip said...


I share your point of view that government should be concerned about well-being of its citizens. For example, I think that universal healthcare is a must. I would also support government industrial policy to create jobs, balance trade, and make sure we as a country design and produce, not just borrow and consume.

But homeownership (as opposed to rent) is NOT a human right and it is bizarre to pretend that it is. I think that government efforts to bail-out banks, and along the way, the most irresponsible home-buyers is not just grotesquely unfair, but also bad economics -- it is the worst possible waist of government money as it rewards the irresponsible and creates nothing of value.

Andrew said...

The government should never, ever intervene into the free market unless someone is destroying another person's rights.

This collapse was caused by the government and its Keynesianism philosophy.

I can't stand when people blame the free market. In a truly free market, all of this crap wouldn't happen in the first place.

Also, recessions are needed to get rid of the malinvestment and incompetent companies.

If words bore you, then you could watch a rap video that should be able to capture your attention: Hayek v. Keynes

gih said...

It depends on how they handle it.


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