1. It is an election year. Conservative politicians must try to convince voters that they are not insensitive. Liberal politicians must try to convince voters that they are not insensitive.
2. Washington worries more about deflation than it worries about inflation. Deflation will erode overall tax income and politicians’ power, whereas inflation will increase overall tax income and politicians’ power.
3. As Boomers retire, social security is headed for a +$1 trillion deficit. Washington must continue to perpetuate the myth that American’s retirement assets are in their homes so that Washington can make social security a needs tested entitlement.
4. GDP is plummeting into a (likely) recession due to declining consumer spending. Only if Washington can fool the voters into thinking the voters have wealth by inflating real estate prices, can Washington successfully fool voters into returning to their buying and spending spree of the 2000-2006 time period.
5. The Federal Reserve has committed over 50% of its balance sheet to bailing out the financial markets in the past six months. It does not have enough left on its balance sheet to bailout the remaining (predicted) financial losses.
6. Voters are being hit in the wallet by rising gasoline prices. Gasoline prices are rising in substantial part, due to the plummeting dollar. The Federal Reserve cannot prop up the dollar by raising interest rates until the financial markets are stable. The financial markets will not be stable until home prices stop declining.
7. Local governments rely heavily on property tax revenue for funding. Declining real estate prices have and will continue to reduce funds available to local governments, thus reducing government employment and spending, prolonging and deepening the (likely) recession.
8. About 65% of America owns their own homes. Simply put, there are more voters who own homes and are watching the value of that asset decline, than there are voters who rent.
9. Wall Street financial institutions contribute far more to politicians than people who rent houses.
10. Only with inflation (including home prices), can Washington hope to minimize the appearance of the ballooning Federal debt burden as a percentage of GDP.
Paul
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4 comments:
I was thinking about bailouts on the way home yesterday, and realized it all really just comes down to which side has the greatest numbers.
We recognize that stealing (money taken from one person for another person's benefit) is wrong up until the point where everyone is okay with stealing. Once it becomes acceptable, it's no longer wrong, and can even be sanctioned by the government.
So how can they actually prop up the prices? Make it illegal to sell a home at a loss < 20%? Buy up homes and demolish them? Nationalize home builders and stop building? Steal all the oil from Iraq and give ever american $1M?
the market will correct itself. All the government can do is try and delay most of it until after the elections.
looks like a very concise picture of the problem. I have one additional reason (stated many times) that I believe should be high on your top ten: The government loans what it can to banks to keep them afloat. Soon they'll be owning bad debt in the form of MBS collateral. This huge problem will have to be mitigated by the Feds bailing out the homeowners attached to this bad debt. Or bailing out homeowners in advance so the Fed doesn't have to take on more bad debt (in the form of MBS). Maybe this your #5, but just a different view.
Either way you look at it; with the central bank manipulation, it is not a free market, and cannot act like one.
I've heard too many personal anecdotes to believe that a government bailout of home"owners" will halt this. Many people do not want a bailout, and will walk.
The market will correct. The only question is how quickly.
Yes, politicians will take the stance of "doing something" because doing nothing would appear to be callous, but it is all just a show.
If this were really about shelter and family, it would be a different story. But it's not. It's about speculation and a shadow banking system. The dollar will become weaker, most of us won't get raises to compensate, energy and food costs will continue to rise.
Unless banks and the government decide to let "homeowners" continue the home ATM withdrawals and housing speculators continue flipping and inflating, how can the party keep going? At a certain point, one can no longer afford to borrow money. So the banks are going to just say "forget about it", wipe the slate clean, and then start handing out money again??
No.
For the national economy, and for personal household economy, it is finally time to pay the piper.
Being the flaming, conspiracy-theorist liberal that I am, I (of course) believe that the plan was always that the poo would hit the blades sometime in the first six months of 2009. But because the Mayberry Machiavellians are so inept, everything blew up right in their faces about 2 years too soon.
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