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Guest Post: The Federal Reserve Should Raise Rates and Lower Them Too
The Federal Reserve Should Raise Rates and Lower Them Too
Submitted By Thomas I. Palley (we remind readers that views by Zero Hedge contributors and guests do not necesssarily represent the opinions of Zero Hedge)
There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others.
In particular, there are strong grounds for the Fed to abandon its support of the Treasury bond market and to raise gradually the federal funds rate (to say one per cent), while simultaneously increasing its purchases of mortgage backed securities. If permissible, the Fed should also purchase state government bonds according to a per capita formula.
Such a recalibration of policy could have positive effects. Increased purchases of MBS will help the housing market, which remains at the heart of the US economy's problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction. Increased MBS purchases could help stem this problem by further lowering mortgage rates. That would help households by facilitating more mortgage refinancing, help banks by reducing foreclosures and help the construction industry by making home ownership cheaper.
This measure would be most effective if paired with the relaxation of Federal Housing Administration, Fannie Mae and Freddie Mac standards forrefinancing of mortgages. Refinancing still viable mortgages that have low or even negative equity would provide a big boost to the distressed corner of the household sector.
Purchases of state government bonds would lower financing costs for states at a time of large state budget deficits. That could help avoid cutbacks to state and local government employment.
Such purchases stand to help the corporate sector since MBS and state bonds are relatively close portfolio substitutes with corporate bonds. Lower MBS and state bond interest rates are therefore likely to spill over and lower corporate bond interest rates, which should help business investment spending.
Abandoning support of the Treasury bond market would cause some small increase in government bond rates. However, any private sector impact would probably be contained by the effect of expanded MBS purchases. Moreover, government interest payments are an income transfer to the private sector, a form of tax rebate. Consequently, increased interest income on government bonds would stimulate consumption spending, especially among households (such as retirees) that rely on such income.
The same logic holds for raising the federal funds rate. This would raise money market and deposit account interest rates, thereby helping savers. To the extent that such financial assets are disproportionately held by lower income households and retirees who spend most of their income, this would boost their income and consumption spending.
Raising interest rates in this fashion would also diminish tendencies towards speculation and excessive risk taking. Prolonged very low interest rate environments encourage yield chasing that over-inflates asset prices, and this process often ends in tears.
By chasing yield, households stand to suffer large losses should policy succeed in guiding the economy out of recession, thereby triggering higher interest rates. This risks a vicious double blow to households whose savings and pensions have already suffered from the financial crisis. Moreover, poorer, less financially sophisticated households are likely to suffer most from rising interest rates as the searing effects of the crisis have tilted money flows toward safe investments such as Treasury bonds. Banks are also at risk to the extent they have been parking excess reserves in longer bonds to exploit the slope of the term structure of interest rates.
One operational issue is how to make a higher federal funds rate stick given banks' excess reserve holdings. The solution is for the Fed to accept interest bearing deposits from money market funds that serve retail investors. Under current policy, the Fed is committed to pay interest on reserves to banks. A better policy is for the Fed to pay interest to households by taking deposits from money market funds.
Throughout the financial crisis Fed and Treasury policy have disproportionately benefited banks and corporations. Banks were bailed out by the Troubled Asset Relief Program, benefited from regulatory forbearance such as suspension of mark-to-market rules and have profited from the Fed pushing short term interest rates to near zero which has widened the interest spread they earn. However, the policy has largely failed to directly help households and has instead relied on hopes of trickle-down effects from banks.
The failure to directly help households has been a grievous policy error. Along with banks and corporations, households have needed debt relief but this has not been forthcoming. Banks have resisted meaningful loan modifications, while many households have been unable to refinance mortgages at lower interest rates because of zero or negative home equity. Consequently, the household sector has remained distressed, which has deepened the recession.
It is high time monetary policy started working directly for households. The proposed recalibration of monetary policy would begin that shift and would help the economy escape recession. It would also reduce the likelihood of future disruptive repercussions from easy money now, and that too is good for households.
Thomas Palley is Schwartz Economic Growth fellow at the New America Foundation in Washington D.C.
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Look at the negative skew in the 10Y. What do think will happen if they raise fed funds?
Um nothing. That's the beauty of grossly over manipulated market. Nothing means a thing.
Exactly. FED step aside and let market forces determine price. Ain't gonna happen though, the Demopublican party has too much on the line for Nov..
They wont step aside. They'll be trampled. Either the people running the school come clean or the children drop out. Easy to maintain control when you are simply disciplining a few bad apples. Hard when every attempt at alchemy of a person turns out causing more trouble.
in other words, the fed should buy anything across the board to help these poor souls of americans who are of course in no way responsible that they are underwater.you are not far away in the united states of america from the old soviet union !
+1
USSA? okay!
When should this string of bail outs end? Fed should buy this, Fed should buy that, etc. Bullshit! What happened to simply being responsible and making prudent decisions in the first place?
The crap should burn out with the relevant parties taking losses (including the so precious home owners who were so incredibly stupid to fuel the bubble).
We can have sharp pain now, or we can have it on an installment plan. Obama's approach to reflate ended up collapsing right toward the 2010 elections, the fool should have sat tight, and perhaps started some stimulus 2010, instead he started early, and the dems will get clubbed in the mid-terms.
I agree, but it's hard to turn down cheap (no money down) loans as it's human nature to want free stuff. That's why gold is at 1235.00-free fiat cash comes at a price...
I've made that point too. Imagine if Obama actually pretended to do the right thing for the USA just until after the 2010 elections and enhanced his majority. HOLY SHIT!
Thankfully he didn't so the last gasp hail mary chance we can save the USA this November is still in the playbook.
Mr. Guest Post. Blow it out your ear. BUY BUY BUY BUY? How about cut the freaking public payrolls first prick. It's time the public pensioners get a taste of what GM first lien bondholders tasted when Obama shit on 200 years of bankruptcy law. We should make UAW and SEIU and AFL-CIO leaders buy the entire stock of Chevy Volts from their offshore accounts.
Two problems with Mr. Palley's proposal:
1) Rising UST rates will increase the deficit and may bankrupt Uncle Sam.
2) The effect of Fed purchases of MBS is likely to be negated (or more than negated) by the effect of rising benchmark (UST) rates unless the Fed buys up virtually the entire market.
Hey I'm all for the system collapsing. the sooner it happens the sooner we can hopefully get back to normal. This crawling along with entrails hanging out blows.
The American Dream; Back to normal.
Most data suggests we're already bankrupt. We have the reserve currency, and that's the only reason we're not a PIIG (with lipstick) candidate..
Yet..
Yup. Just another way to make a steep yield curve (kick the can off the cliff and jump after it). Oh, and socialize all losses. Brilliant.
The FED is now the buyer of last resort. They have the printing press and will keep buying to infinity. Unless we get rid of them and the Demopublican party that gives them unlimited monetary control. God Bless..
Why are people still taking about how the Fed should save us?
+10
We are well past being able to be saved. The stern is out of the water, and the ship is headed to the bottom.
F>U>B>A>R
F>I>G>M>A (Slight change, A stands for Ammo.)
Do not give up the fight (it's a process and will take time)! There will be pain (which refines and changes attitudes) as this plays out. Enough folk's are becoming aware of the need to take our country back from the Demopublic's and that nothing worth having comes free-it's a matter of time. One Nation under God is the answer (as it used to say on our real money). He's been trying to get our attention if you look at the last decade. God Bless...
I see a God hater has flagged me. Any More??
The Truth About Religion
http://www.youtube.com/watch?v=TjGkRFFBd0APS: I didn't junk you. I don't junk anybody.
They still don't get it?
Well, it goes back to 1913. Who in their right mind would give a private bank the power to control interest rates and print IOU's to use as cash?
Hmmm... or wouldn't it be better if they all just let the markets be, uh, what's the word, I kinda forgot it... oh yeah, "MARKETS"?????????????????????????? Jesus H. Christ, when will this fucking mania for manipulation end? Until these fucking things clear there will be no fucking recovery, just more long drawn out agony... like papaswamp said, "this crawling along with entrails hanging out blows." Poetry, Papaswamp, pure poetry. Quote of the fucking Millenium.
Agree on your point, and I feel your frustration (as many), but try to leave profanity out of your analysis as this offends a lot of viewer's. When addressing Christ, use extreme care of context as you are showing disrespect for Him and a lot of His followers. We got here cause we've slowly taken God out of our Country...
JFC. How's that? Better now?
+1
Eat shit and don't tell me how to address GAWD you pontificating asshole... who the f^%k do you think you are? We got here because a lot of neo-christian shits like you tried to hijack the US Constitution by excluding every religion on the planet except their own fucked up hypocritical criminal conspiracy aka christianity from having a seat at the table of free speech and free religion here... shouldn't you be out burning down a mosque or bombing some dirty little yellow and brown savages back to the Stone Age?
Don't know why I'm wasting time here. I am a former United States Marine that served so people like you can freely spew venom and speak as a fool. Have you even read the Constitution? You obviously have no concept of a Sovereign God or His hand in the history of our country.
You are probably right on that one. As I recall, it was the hard work of a few hardy men.
You're right - I have absolutely NO concept of a sovereign GAWD that a bunch of religious nutjobs are using as an excuse to shove our close-minded right wing religious bullshit up the asses of every non-white non-Christian non-right wing little brown person who happens to have a different higher power they believe in. So what? I'm a former United States Army officer who thinks this is a free country and not the exclusive domain of GAWD nutjobs. Were you one of the cretins who used Trijicon weapon sights inscribed with New Testament references manufactured by that "Christian" armaments manufacturer out in Michigan? You surely do sound like one of THEM... they're TOTALLY despicable.
http://www.mahalo.com/trijicon-weapons-bible-codes
My son was an Army Field Artillery Officer. What was your MOS?
2110... still have my DD214
ehe... banks you mean.
Here's a quote from the article I like even better:
Something about that word "taking" just gives me the willies.
The Central Bank system can flail around all it wants to - raise this, buy that. It won't change the outcome. As they say, events can take a life of their own.
Ugh. The same old "If only we lower rates more, homes will sell!" logic.
Rates are already lower than they've ever been. Who the hell is being deterred from buying a home right now because the rates are 4.5%?!
Maybe if they'd admit that they're lying outrageously about the real unemployment rate then they'd start to consider that a 20% unemployment rate not only takes 20% of the buyers out of the market, but also another similar sized chunk of the populace who fear they'll be joining that 20%. Combine that with the people whose mortgages are under water and you can start to see the econ 101 reason.
Hmm, let's see. No demand makes price go . . .
Hey, I'd buy at 0-0.25%, just like the banks.
Hell, I might even buy treasuries to show my appreciation.
I stopped reading your article after I read the following:
" Such a recalibration of policy could have positive effects. Increased purchases of MBS will help the housing market, which remains at the heart of the US economy's problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction. Increased MBS purchases could help stem this problem by further lowering mortgage rates. That would help households by facilitating more mortgage refinancing, help banks by reducing foreclosures and help the construction industry by making home ownership cheaper."
1. Who decides which markets need help and which markets don't? Do we let the free market decide or the Government (central planning)?
2. How do we know that the housing market needs help at all?
3. Maybe by the market collapsing the market is healing itself?
The problem was that government intervention created the bubble in the first place.
OK. I will read some more... Is this article a joke?
Next you say the following:
" Purchases of state government bonds would lower financing costs for states at a time of large state budget deficits. That could help avoid cutbacks to state and local government employment. "
Again, by bailing out the states you are only postponing the inevitable. The market is trying to punish the corrupt state governments from their proliferate spending binge. They have to fail so the market can re-balance itself, doing so will put capital back in private hand were it should be. We will also have the added benefit that we can all see the ideas of J. M. Keynes buried for good.
I can't believe people in Washington would listen to a think tank like America Foundation, but it looks like they are and have been for a long time. Now I see why we are so fucked.
The problem is not the perpetual intervention, the problem is the right mix of intervention. Give me a break.
As well as; Where do they get the money to pay for it?
Tip toe through the window
By the window, that is where I'll be
Come tip toe through the tulips with me.
As well as; Where do they get the money to pay for it?
Tip toe through the window
By the window, that is where I'll be
Come tip toe through the tulips with me.
Right mix? We are dying to hear! Intervention is antithisis to free market price discovery. Actually, I don't think we want to know true market price. The truth, You can't handle the truth-A Few Good Men...
The author, Thomas I. Palley, was a former director of the Open Societies Institutes Globalization Reform Project; an institute formed by George Soros.
Officers of the New America Foundation include:
Steve Coll, a former managing editor of The Washington Post, who succeeded Ted Halstead in 2007 as President.
Google CEO Eric Schmidt, chairman of the foundation's board of directors, whose networth in 2010 was US$6.3 billion, ranked by Forbes in 2006 as the 129th richest person in the world
and
Board member Laura Tyson, a member of the Council on Foreign Relations and former chair of Clinton’s Council of Economic Advisers, now an economic adviser to Barack Obama.
I think Glenn Beck is at war with this scum. Palley is a neo Keynesian socialist hack.
NWO shoeshine boy..
At this point, one can only draw the conclusion that rich folks will always recommend "solutions" that increase their wealth.
Hey... now there's a bunch of people who surely have America's best interests at heart.
Feh.
Now that everyone has refinanced their house at lower rates, if the fed funds rate goes up it will cut into the banks profit because the difference is smaller.
Sure, do it. All the US banks are a few inevitable basis points away from going bankrupt anyway. Raise the rates and speed up the process.
( to say 1%)
A truly classic example of a considered Keynesian formula. Throw a dart.
this type of recommendation begins from the idea that govt should continue intervention, but the format or composition of the intervention should change, and that change will benefit citizens over banks.
there's no suggestion in his discussion that the govt intervention itself is a problem, so again we have someone who wants to deal with symptoms rather than the problem.
A reformatting of extend & pretend will not greatly change the situation.
The Fed needs to stop supporting the mortgage market, in preference to other private markets.
Equities would appear to be the very undervalued asset class here, in particular, equities of legitimately productive firms, ie: mining and energy firms.
Why doesn't the Fed start monetizing the interests of mining and energy firms? Why keep supporting mortgages?
Makes no sense to me. Continuing to buy more MBS will be an unmitigated and ongoing disaster for the US.
More nonsense from a Yale economics PhD. Yale, Harvard, Columbia and Princeton economics, business and law graduates have done enough damage to this country and the world. Time for Brown, Cornell, Dartmouth, and U of P to have a turn.
Even those seated high on the most exalted throne are still just sitting on their own arses.
Look no further than headline rates to understand what's happening in this economy:
-Zombie banks borrow rate: 0.25%
-Consumer borrow rate: 16.5%
Squander Treasury money on stupid bank prop desk tricks while Main Street flounders.
Bernanke almost missed 10 am speech
due to medical emergency
Jackson Hole Weekly Gazette reports: At 6:34 am Friday morning Jackson Hole 911 received this frantic phone call:
Ben Bernanke: "Help! My bowels won't move. The pressure is unbearable. I'm going to faint."
Dispatcher: "Who is calling?"
Ben: "Ben Bernanke. Hurry, my backside is bloating like a ballon."
Dispatcher: "Burnwanky? How do you spell that?"
Ben: "BER-NAN-KE"
Dispatcher: "Does that rhyme with hanky-panky?"
Ben: "Well, yes, but hurry. I have to give a speech at 10 am, the entire world is waiting on me. The stock market will rise or fall on every word I say, every breath I take, every move I make."
Dispatcher: "Have you taken a psychotropic drug in the last 24 hours? Are you under the care of a psychiatrist?"
Ben: "Never mind. The EMTs have arrived."
The two EMTs saw Ben on the toilet doubled over in pain, straining to make a bowl movement. The EMTs removed Ben from the toilet, laid him face down on the bathroom floor, and immediately saw the obstruction blocking Ben's bowel movement: Steve Liesman's nose was stuck in Ben's anus.
The two strong EMTs tried and tried but could not pry Mr. Liesman from Ben's backside. The EMTs then tried defibrillators on Mr. Liesman's ears, but Mr. Liesman's nose burrowed deeper into moaning Ben's rear-end. Finally the EMTs pulled out their tasers, and tasered Mr. Liesman's rear-end with a double dose of electric current to disrupt voluntary control of muscles: the medical term is neuromuscular incapacitation.
The EMTs succeeded, and Mr. Liesman's nose popped out of Mr. Bernanke's ass like a champagne cork. The bubbly that gushed out and drenched Mr. Liesman was not $200-a-bottle Dom Pérignon, but Mr. Liesman seemed to enjoy it as if it was world-class champagne.
The EMTs were revulsed by this scene, and asked Mr. Bernanke if he would like them to throw this turd into their biohazard disposal bag. Mr. Bernanke protested, saying "That is no turd. That is Steve Liesman, economics reporter for CNBC."
I tried to read this article, I really did but... Ka-woosh. Flushing. It's not just where the Mets play anymore.
This contributor, Palley, a Soros protégé, is offering a complicated plan that at bottom will give the banks debt relief.
Says Palley, “Increased purchases of MBS will help the housing market, which remains at the heart of the US economy's problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction.”
The homeowner advantage has been played before. It’s a consistent theme of the money rulers that something must be done to help keep people in their homes, building and buying new homes, and pumping up the housing market. It reminds me of the shadow figures lurking in the background waiting for developments to take advantage of the deal, such as the performance of George Soros in the shameful saga of IndyMac.
Cui bono?
Why did New York Senator Charles Schumer damage Indymac liquidity so that IndyMac would be immediately bankrupted? Who profited? It was Soros, Mnuchin and John Paulson.
The OneWest Boys Who Got the Sweetheart Deal is a video produced by TBWS Daily.com, founded by a group of real estate and mortgage industry entrepreneurs to provide tools and industry integrity for their businesses. Here is the transcript:
Consider this! Like many other banks, Indymac Bank closed its doors and was seized by the FDIC in July 2008. The assets of Indymac Bank were sold to OneWest Bank by the FDIC in March 2009.
Well, guess who owns OneWest Bank? That would be Goldman Sachs’ VP Steven Mnuchin and big time Sachs’ investors and billionaires George Soros and John Paulson (of no blood relation to ex-Goldman Sachs CEO Hank Paulson who’d be the ex-secretary of the treasury) …
All current residential mortgages were purchased at 70% of the par value. All HELOC’s were purchased at 58% of the value. But just to make sure these guys remained cozy and warm, the FDIC decided to step up and cover 80% to 95% of the losses they might incur from any of those naughty Indymac mortgage homeowners.
So you’re probably asking yourself why we think you should know this. Well, in the event of a short sale or a foreclosure, the loss is calculated using the original loan balance and not the amount OneWest Bank paid for the loan.
Here’s an actual example from a client of one of our viewers. Take an actual loan balance of $478,000 plus 6 months’ missed payments for a grand total of $485,200. OneWest Bank paid $334,600 for that loan. Okay. Now, the underwater homeowner has an all cash offer that nets $241,000 for OneWest Bank. Well, according to the FDIC formula, you take the original loan amount, $485,200 minus the amount of the offer $241,000, and that leaves you with $244,200 bucks.
Next, according to the sweetheart deal, the FDIC writes a check to OneWest Bank for 80% of the net loss ($244,200). So in this case, OneWest Bank gets a check from the taxpayer courtesy of the FDIC for $195,360. So, now, add the $195,360 from the government to the $241,000 cash offer and OneWest Bank just made $436,360 on a loan that they bought for only $334,600 and all they had to do is sell it for whatever they wanted to.
Guys, they can’t loss money on this deal. Think about it. So OneWest Bank just profited from the short sale to the tune of $101,760--all thanks to the insane arrangement that they have with the FDIC… Hey, whoever said it’s good to have friends in high places wasn’t kidding around.
So the next time you ask yourself why is it so hard to get a loan modification, the answer is because there’s too much money to be made with short sales and foreclosures.
Now, are you ready for an encore? Now remember, even though OneWest Bank profited by more than $100,000, the house was still sold for less than the full loan amount. In this actual scenario, the borrower was forced to sign a promissory note for $75,000 with OneWest Bank. So who really pays in the end? … Well, we’ll just let you decide.
Oh, and by the way, the FDIC just announced it’s to start borrowing money from the treasury, the treasury being the place where all those Goldman Sachs guys called home before they called OneWest Bank home. If you’re as mad about this as Frank and I are, share this video with everyone you know. Help us reveal where the real problems lie in the industry that we all care so deeply about. (End)
http://www.youtube.com/watch?v=ssl5yb7FewA
OneWest Bank’s Chief Executive Officer is Terry Laughlin, a veteran banking executive with over 30 years of banking experience who has held senior positions at Merrill Lynch Bank & Trust, FleetBoston and Mellon Bank.
Let the hands-off markets decide, not the hands-on bankers!
Whilst there are "Hands - on bankers, there will always be blatant theft directly linked to them. If they are intent on fucking over the worlds workers, by stealing their savings through financial conspiracies, from the very last cookie jar,(there are no hidie-holes) then it is the duty of each citizen to go as deeply into debt as they can con the banks into agreeing to, and then walk away. Make it gold and silver that you purchase with the proceeds and stop using their proxy for money. It is the only way you will be left with anything in your hands.
It is time to play by their rules and go "hands -on" back at them.
Bring it down. Its only fair.
Oh, yes there are. Just not the ones sitting out in broad daylight with government and bank strings attached.
One must use one's imagination! The gold and silver you mention is the key, but must be bought with discretion. Time's a-wastin'.
The fact that the Fed still needs to meddle is proof of how deep a shit hole the banks are still in.
Feed the zombies. Just like Japan for the last 20 years.
BRAIN: "Are you thinking what I'm thinking Pinky"?
PINKY: "I think so Brain, but how do we get 500 chickens into fishnet stockings in the middle of summer?"
The FOMC meeting ends.
Exit Stage Left.
Yo Palley, I think you mistook ZH with HuffPo. The have a different domain name, try it.. All sorts of lower interest rate enthusiasts there coupled with a bunch of commies who censor your comments before posting.. You'll love it there!!
Thomas I. Palley strongly supports an idea of wealth redistribution. He just doesn't think the FED do it fairly.
Well, another socialist shit-head , we do not need "a fair central-planning" economy in the USA. For this matter, stick your shitty socialist ideas back into your shitty ass.
Remember that even Russia, China, and all East Europe (who know the first-hand figured out that socialism is a POS and it doesn't work.
So, Thomas, please take your Marxist ideas to some other places were people are utterly stupid, lazy, and corrupt.
Mr. Palley was with the Open Society Institute, a known NWO/Soros front. Mr. Paley is currently at the New America Foundation which is loaded with CFR members and related NWO/Nazi/Commie vermin.
http://en.wikipedia.org/wiki/New_America_Foundation
This is utter and complete nonsense:
Increased purchases of MBS will help the housing market, which remains at the heart of the US economy's problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction. Increased MBS purchases could help stem this problem by further lowering mortgage rates. That would help households by facilitating more mortgage refinancing, help banks by reducing foreclosures and help the construction industry by making home ownership cheaper.
What Keynesian economic brainwasher convinced Mr. Pally this is a logical set of statements?
If a homeowner is underwater on his mortgage, how can it be refinanced, even at a 0% rate? From where are the funds to cover the difference between the outstanding loan balance and the current (still overinflated) value of the house to magically appear? Given that banks are permitted mark-to-fantasy valuation of their assets, they are disincentivized from realizing any losses. What homeowner can be logically expected to fork over $50-$200K to make some bank whole on their existing mortgage(s), so that they can refinance? That's insane.
Mr. Palley is a derisible idiot and TD should be ashamed for posting this without the dripping contempt usually bathing the inept keyboard droolings of our alleged economic and political elite.
Actually, I think the original article was revised for the general public. Go through the article and remove these words: consumers, buyers, households, owners, employee, savers, retiree, etc. Insert the word "bank" and you have the original article intact.
I know good satire when I read it. Well done Palley. Well done...
He really believes all this crap he wrote. Or he thinks there are people stupid enough to believe it.
After buying over 1 tr of MBS, the housing market is still under life support. So one has to conclude this guy is either "pimping" his books like Gross, or/and he is like most american oligarchs/elites, busily practising yoga by inserting his head between his legs.
this farticle had about as much use as used toilet paper...just more recipes for failed planned central planning purcolating from the mouths of boobs...
So making housing more expensive will help make home ownership cheaper? yeah, right... This article is idiotic.