Monday, March 31, 2008

It's Not Broke, Please Don't Fix It

For the last couple weeks the MSM has been noting that the major presidential candidates haven’t really put together a plan to address the housing crisis, which has now spread to a broader economic crisis. I’m not exactly sure why the MSM was clamoring for this, perhaps to give commentators something to gnaw on. Because anyone who is really paying attention to the housing bust knows that by the time the next president is sworn in much of the drama will have already played out.

Last week MSM got its wish, all three candidates discussed their economic platform. Unfortunately, wsing the housing market as an economic platform, while perhaps telling about their general approach to the economy, is not all that informative since the crisis will be in very different phase, needing very different solutions, by the time the next president takes office.

So that brings us to the Bush administration, whose approach I more or less agree with (yes you heard that right…I am agreeing with the Bush administration). Last Wednesday U.S. Treasury Secretary Henry Paulson said policy-makers should not interfere with an "inevitable" drop in housing prices but should work to minimize the impact on the economy.

According to last week’s NAR report (ironically caught off guard that sales were slightly up, but prices down) as well as local anecdotes (that there is considerable demand at the 200k level), the market appears to be in fine economic working order. The more prices drop, the more demand is stimulated. The market is not broke. Its working just as it should. The more affordable homes become, the more first time buyers will be able to enter the market, thus repairing the broken links of the housing food chain.

This is not to say that the government should do nothing. In fact there is a lot the government can do that doesn’t involve messing with the necessary market correction. The first and foremost is to modify/regulate the financial and RE industries to keep this from happening again. And it sounds like Paulson is leading the charge on this as well. (He is really starting to grow on me. Initially I was disgusted by his appointment, figuring he was there to do Wall Street’s bidding, but as this crisis has unfolded, it appears that he has the inside knowledge to know what type of regulation is likely to be the most effective, and is actually leading the charge.)

The second thing the government, particularly local governments, can do, is to provide assistance to those going through the foreclosure or short sale process so they don’t get taken advantage of. Local agencies can provide lists of suitable rentals homes or apartments, negotiate agreements with local landlords to take families whose credit may be damaged by a foreclosure etc.

In general I think this situation is very similar to open trade policy. The theory goes that open trade benefits the broader market by lowering prices. Government sets requirements to ensure safe products, and healthy working and environmental conditions. In exchange for lower priced goods coming from overseas, pockets of domestic workers are dislocated. Thus part of domestic trade policy is to address those dislocations and minimize their impact on the broader market.


Patient Renter said...

It is sad how the media and candidates are hammering on each other to come up with a housing "solution", and mostly sad that the only correct solution (do nothing) is viewed as wrong simply because it is inaction.

Unfortunately, we have a situation where the media and candidates are playing on the emotions of Americans (what else is new) and are playing up ridiculous ideas that many/most homeowners in trouble were somehow victimized or that they will be out on the street if and when they "lose their home".

The entire situation has been framed in terms that are out of touch with reality. No, people will not be homeless, they'll be renters. No, people were not generally victimized, they were greedy or stupid or simply bit off more than they could afford. Being that the problem has been incorrectly framed, it's no surprise that the proposed solutions to the problem are also incorrect, and stupid.

Jacob said...

But the most important is that the next president will have a different situation when he/she is sworn in.

Most of the resets due to happen will occur this year, prices are already down ~35%. We have likely already peaked sales wise again in march same as 07.

Fed can only cut so many more times so once they are out of rubber bullets completely the stock market will be in free fall.

But whatever happens it wont be the end of the world. The market will correct, and I just hope it happens in a couple more years instead of 15...

alba said...

Lies, lies, lies! The Bush administration doesn't want to bail out homeowners, unless too many bad loans are being sold off. Pick off the gov-speak, and corp-speak, and you'll see that they'll do whatever it takes to maintain a fluid banking system, including bailouts of quasi-homeowners. So will the next president. Its not the homeowners they're worried about; just their loans. No amount of distressed homeowners measure up to the severity and viability of a major pillar of our nation; the banking system.

Something has been done (last August), will continue to be done -(Bear Stearns); and needs to continue to be done (28-day loans to non-banks). These are not free market forces, and the Fed/Treasury is not sitting idly by. It wasn't free market forces that put fat bonuses, in December, in the hands of thousands of folks in the financial industry.

Sippn said...

It is broke, just what the fix is the question.

You think it won't happen again unless fixed?

Lack of financial regulation and zero equity loans are also the main components of the '29 crash, the S&L collapse and '81 housing slowdown, etc.

They might call it something else, but its all financial.