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Milton J. Madison - An American Refugee Now Living in China, Where Liberty is Ascending

Federalism, Free Markets and the Liberty To Let One's Mind Wander. I Am Very Worried About the Fate of Liberty in the USA, Where Government is Taking people's Lives ____________________________________________________________________________________________ "Extremism in defense of liberty is no vice. Tolerance in the face of tyranny is no virtue." -Barry Goldwater-

Tuesday, September 07, 2010

Housing Choice - Help Today’s Owners or Future Buyers - NYTimes.com

Finally, socialists are realizing that their grand utopian plans to 'assist' people in their home ownership....did not work. Well, maybe they haven't realized just yet that their interventions in the home marketplace created this disaster, but they are realizing now, that there is very little that they can do to either temper the decline or support prices.

Invariably, one cheerleading government intervention in economic matters over allowing markets to operate freely, the admission of failure by the this socialist mouthpiece, The New York Times, is truly amazing.....
Caught in the middle is an administration that gambled on a recovery that is not happening.

“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
The current government policy of trying to over value housing or trying to force housing prices higher than it would be without government intervention promises that housing prices will not adjust to where they should be and this creates inefficiency and promises to only prolong the pain or cause new buyers to pay more than they should if there is no intervention.

Current central planning policy by the US government is to use non-market intervention techniques, such as a buyer credit (creating higher prices than would exist without the credit) and direct subsidies to homeowners (mortgage modification) unable to pay off their home debts. This transfer of wealth from taxpayers to the current owners of homes is rewarding economic behaviors that created higher prices and the volatility in the past. But furthermore, the central government is continuing and increasing it's non-market intervention practices that created the problem to start with.

Consider these market US government intervention issues that have impacted prices leading to this problem:
1. Mortgage interest deduction: By allowing homeowners to deduct interest expenses on their taxes, homeowners are able to carry higher levels of debt relative to equity than one could without these subsidies. Over time, as markets arbitrage this subsidy, the natural response is use the after tax cost of homeownership to calculate the true cost of owning a home. Naturally, a buyer will buy only those homes that they can afford under the subsidy program and this is a more expensive home than one would be able to afford in an environment without subsidies. As a result, an economy over invests in housing relative to other investments as people buy more house, leverage this investment since additional debt is subsidized and from an economy-wide perspective, increases total indebtedness and higher prices of housing as higher prices are subsidized.

2. Sub-prime: The talking heads in Washington have laid fault with 'greedy bankers' as the guilty party in the reckless lending that took place to less than acceptable borrowers. However, the facts are much less sanguine than those that twist reality. The US government, through non-market intervention techniques, used law and jawboning to force private businesses in the form of banks to make and hold these loans in the 1990's. This large influx of funds into this market segment had the effect of increasing prices in this market segment, also increased debt levels and prices well above what they would have been without this intervention. Additionally, when the government could no longer force private businesses to buy and hold these loans, they forced the Government Sponsored Enterprises (GSE's), Freddie Mac and Fannie Mae, to buy and hold these securities. Additionally, with this intervention forcing these government supported enterprises to be a buyer of these securities, even more funds entered this market and a active and profitable secondary market was created that sold these assets to investors around the globe. People believed that since government had such a large stake in the support of this market sector, that it could not afford to let it fail. Oh well, fools and their money are soon parted.

3. GSE's- Fannie Mae and Freddie Mac, where the former has been in business since the 1930's, guarantees mortgage loans so that they can be sold to third party investors. These financial institutions were specially regulated by the government and were not nor ever were subject to the same regulations or capital rules as private financial companies. Since these companies did not have to hold capital relative to the risk that they were taking, they took much more risk than others could. This had the effect of squeezing out other competitors and concentrating the business with these 2 companies. Additionally, when private institutions and investors could not be forced to hold all of the sub-prime riskier loans being created, these institutions were told to buy and hold these securities by the government. When music stopped and sub-prime started to default, these companies quickly became insolvent and were not able to refinance sub-prime and have constrained capacity to loan to traditional borrowers.
Given the problems that the government has created through these non-market interventions, one has to wonder why anyone would want them involved in solving the problem that they created.

So, those calling for government restraint are those that have little voice over many decades. Lower prices for housing will lead to freeing up more money for owners over tiem. It will be painful, but it is something that will be impossible to avoid without even more extraordinary non-market interventions that will created even more mis-allocation of resources in the economy.

Housing Choice - Help Today’s Owners or Future Buyers - NYTimes.com

2 Comments:

At 12:14 PM, Anonymous Anonymous said...

I believe that all of the forclosed and abandoned homes should be given to the poor to give them a chance in society.

 
At 2:33 PM, Blogger glenzo said...

Abandoned homes are available. But foreclosed homes are owned by banks and other investors that have title to the property. They have the option to sell, retain or give it away as their exclusive choice.

 

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