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A Really Bad Plan for Reviving the Housing Market
For breathtakingly stupid political ideas and catastrophic “solutions” to America’s biggest problems, it’s hard to beat the New York Times op-ed page. There, joined by such jihadists of the Left as Frank Rich and Maureen Dowd, resides the peerlessly wrong-headed economist Paul Krugman, whose Nobel Prize was as well-deserved as the one Yasser Arafat received for helping to bring Peace to the world. Until yesterday, we might have thought Krugman had cornered the market for the absolute worst ideas on how to revive the economy. Here’s a guy who actually seems to believe, in his heart of hearts, that the reason this has not yet occurred is that the central banks of Europe, the U.S. and Japan have not thrown enough money at the problem. We stopped counting stimulus dollars and guarantees ourselves when the total hit $15 trillion a couple of years ago. That was long after we’d become convinced that deficit spending in such cosmic quantities, far from reviving the economy, would ultimately bury the U.S. in debt. As it has. Such concerns pose no problem for Krugman, however, since he simply avoids using the word “debt” in his Martian-friendly economic essays.

There are so many world-class crackpots in Krugman’s chosen field that it was all but inevitable a colleague would surface to challenge the Nobelist for the top spot in the Dismal Science’s Hall of Shame. Enter one James A. Wilcox, author of a Wednesday op-ed piece that purported to offer “A Way to Make People Buy Homes Again”. Wilcox, a professor at Berkeley, of all places, says all that is needed to jump-start the residential real estate market is government mortgage insurance. Specifically, he suggests a one-time premium equal to one percent on the home’s purchase price, or $2000 for a house selling for $200,000. At the end of three years, says Wilcox, “the government would automatically mail checks to protected homeowners if average house prices in their area were lower than when they purchased their homes.” He’s right about one thing: this would stimulate demand from would-be buyers who have been sitting on the fence waiting for prices to fall even further. Sounds like a good idea, right? In fact, it is a recipe for disaster. To understand why, let’s consider the main features of Wilcox’s proposal:
- He says mortgage lenders might loosen up if “the government” (aka taxpayers) were to backstop prices. Do we really need easier credit for home buyers? Have we learned nothing from the disaster this caused in the first place? In fact, the 20% downpayment lenders are now demanding is about as loose as mortgages should ever have gotten. In effect, Wilcox is suggesting that we stimulate the housing market by creating a whole new army of poorly qualified buyers.
- Evidently unable to chew gum and breathe at the same time, argumentatively speaking, he talks about stimulating housing demand without even considering supply. Does anyone doubt that there are millions of sellers out there, including banks holding foreclosed loans, waiting for some bids to surface so that they can finally whack-the-mole and get out of Dodge?
- It should also be clear (to anyone but a university-trained economist, that is) that the moment “the government” guarantees that buyers cannot lose no matter how much they pay for homes, neither buyer nor seller will much care about the home’s true market value.
- Wilcox says that stimulating home purchases would have a ripple effect on the economy. Only an egghead could fail to see that the ripple would be financed by huge news quantities of borrowing collateralized by a wasting asset that produces nothing.
- With a straight face, and apparently using Obamacare math, Wilcox informs us that if two million participants were to take advantage of his hare-brained scheme, “the expected net cost to taxpayers would be a few billion dollars annually.” We won’t even comment, since we can hear you laughing at that one already.
Unfortunately, Wilcox and the Times’ benighted readers, conditioned by the likes of Krugman to think like left-leaning politicians, would see nothing funny in Wilcox’s nutty idea. But there is no denying its populist appeal. Lord help us if mortgage insurance ever comes up for a vote on Capitol Hill.
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Jihadists of the left? What are you trying to do, get a job as Rush Limbaugh's boy? Don't paint all lefties with the same brush. I'm way to the left of Krugman, whatever that means. I want the whole house of cards to go down. I want apartments in Manhattan and houses in the surrounding areas to return to prices that middle class families can afford, instead of still being only available to the very rich. I want the entire mortgage-backed securities racket to be shut down. No more bundling of loans. No more rubberstamping by credit rating agencies. No more credit default swaps. All that crap is a recipe for institutionalized fraud on the part of financial institutions. Lenders should have to hold on to at least 50% of the loans they give out. Are you with me, Ackerman?
Liquid Courage has it right, meddling is not the answer. Its a Housing M A R K E T....get it? Market? The functions normally available to process this downturn in the mkt have not been allowed to function...............then the Meddling begins because of our new 'Situation' we find ourselves in. Someone will lose. End of story. Some individuals, some banks, some go under, some with cash pick up the pieces and we move on. Not letting the functions function, we create a Crisis out of nothing and distort the entire show. You cannot protect people any more than a bank from bad decisions in the housing market, sorry. No one has any idea where the housing market could be or should be right now, it is suspended with the rest of the financial world while the Meddlers figure out what is best for everyone.
Really good stuff, Ackerman.
Fun to read, short and sharp as a tack.
I am inclined to believe that the inflated mortgage contracts are the problem, along with Fannie/Freddie (and the Fed) leading the way in pretending that home values are not exaggerated. We need desperately the RESET, and that means deflation, which is what our banker elites so desperately seek to avoid. Here's a proposal; anyone who goes into default (by choice or force) has his house listed on E-Bay type site. Then comes the bidding. When the winner places his bid the current homeowner can choose to stay in the home by meeting the highest bid. If he cannot or does not want to, the high bid takes the property and the bank eats the loss. New and non-criminal banks can provide the financing in accord with legitimate terms (i.e. significant downpayment, real interest rate). Benefits: houses at increasingly real values with qualified owners making payments. Former homowner liberated from unviable position, overloaded banks get their assets revalued realistically, which probably renders them insolvent, and they can be liquidated to their superior competitors. Investors in MBS, well now you'll finally see what you bought and you can start the lawsuits, but better move fast the salesmen are evaporating.
Kyle Bass on when the shit is going to hit the fan: http://bit.ly/ywzqNI
What few people realize is that Krugman's reward had nothing whatsoever to do with his Keynesian work. He got it for his work on globalization, and mainly for showing that it is driven as much by economies of scale as by national competitive advantages.
The other, de facto reason was that he was an outspoken critic of Bush. Ironically, especially on deficit grounds.
Krugman has offered one of the few practical solutions and you need more patience, guys.
It took the US 30 years to go from 117% debt/GDP in 1945 to 35% under Nixon.
As long as you can keep the bond market under control everything will be fine.
Instead of risking deflation via "saving" you should think of sharing the American dream with another 1 m Mexican migrants by making them proud home owners.
Diversity is the solution to a rather simple financial problem.
Median house price in the future society of the left, Detroit, is $6,000 today. The answer for the rest of the landscape is obvious - inflation. You see, it all works. It really does. We just need to let things work out - there are really smart guys all over the government who have advanced degrees and study this and they KNOW so STFU and let it happen for chrissakes!!! Anyone want some donuts? Werthers?
Thank you Rick, excellent piece!
If the US is 10yrs behind Japan, the UK is another 4yrs behind that. Our house prices are still massively overpriced. At least in the US houses are returning to their true value. Our economy is so dependent on high house prices, thry'll do anything to keep them up. We are heading for a huge fall.
Hey students at Berkeley. Wondered why you have such a huge student loan on your back?
See Wilcox $212k salary. Hello.
That'll learn 'em!
or not
Another idea would be to allow people to use the Money in their IRA, 401K as a downpayment on a property or Investment Property without a Penalty for taking the Money out. This might encourage People to buy now. As they would have the Cash they need to buy from their Retirement Account. They could put a time limit on the exception for no taxation on taking the Money without Penalty for a downpayment. This would give a sense of urgency.
the only sense of urgency is to allow home prices to retrace to historical trend levels; and as soon as possible
Great idea, but someone already thought of it.....long ago. First time home purchases is one of the few ways to pull money out of most qualified accounts without a penalty already. So it you do this, and the price of real estate drops, not only do you lose in your taxable net worth, but your retirement has suffered.
As an aside, the average American's three greatest lifetime expenditures are housing, healthcare, and retirement. Imagine these as pieces of a pie. If the housing piece, artificially bloated for 75+ years (thanks FDR), gets bigger and bigger, the other two slices, by definition, must get smaller. What are the two greatest drains on our nation's finances right now? That's right, social security and Medicare........brilliant.
This is an excellent idea, but it will never happen because it will drain money from Wall Street.
Most people in the current environment recognize that a rental home or investment property (non-retail) is an excellent place to put your money. You have at least some control, whereas when you send your money to the Street, you surrender control to the "experts".
www.SouthGaRealEstateReport.com
"This is an excellent idea, but it will never happen because it will drain money from Wall Street."
How does this drain money from Wall Street? Every effort to prop up real estate prices (artificially) is specifically designed to reduce the amount of eventual writedowns Wall Street must take. Every time I hear another hairbrained scheme to prop up real estate prices, I immediately start calculating how much this is saving the TBTF banks.
I think any money moving out of 401k back to local communities is a good thing, but the Street won't like it.
I see your point that by allowing this movement it would eventually support real estate values, but it would take time. The Street thinks in the short term and will fight this movement of money away from their control. They always have, always will.
Why do you think the banks that are getting shuttered are being absorbed by the TBTF. Forcing the funds back into their control.
What they need to do is what Volker did during his Term. What they did was to allow FHA to finance a Rental Property with a total out of pocket cash of 15%. They also allowed a 15 year depreciation of the Property. This was good for an Investor as with the rapid depreciation it reduced the cost of the carrying the House and you could actually rent it for less.
This was a time when the Mortgage rate was at 13 to 15%. Investors ran in and scooped up the Housing Inventory. I know I bought a bunch of them. Half of them I kept for 15 years and the other half I still own after 25 years.
I used the property's for my Retirement instead of investing in an IRA. Now I live on the Rental Income.
Today you need 25% down and another 8% in closing costs to buy a Rental Property. Assuming any Bank would even give you a loan.
Is that a German V3?
The Fed via easy money, failing to be straightforward about the shadow inventory risk to buyers, and discouraging saving, is setting up the ultimate challenge to the institution.
The Fed is the leader of lemmings.
The Monkey Thu, 01/26/2012 - 20:03 | 2101398
Well stated.
can I get a CDO on this insurance policy...i want to make a bet, on the bet, on the bet that some clown will not pay on his mortgage and that the Feds step in and send him a check each month..........
James A. Wilcox
External Service and Assignments
It was announced late Friday that CAL State 9 Credit Union would be placed into conservatorship under the National Credit Union Administration (NCUA).
Regarding Cal State 9, this San Francisco Chronicle article received a quote from a California official who stated that the action was “related to the credit union’s defaults on mortgages.” Loan losses in the third quarter ending in September were $54.5 million, up from $17.5 million in the previous quarter. You can view more of the financials of Cal State 9 from this NCUA page.
http://bankimplode.com/blog/2008/01/21/cal-state-9-credit-union/
That is tooo much! Talk about the go to do guy on "fixing" the market. This guy couldn't fix a cat.
Natty, thanks for sharing. You can't make this stuff up. The arrogance of these experts is mind boggling.
idiots will tell you that sharia might be the answer, but, Liberty is the solution.
http://covert.mypressonline.com
Dude, liberty is illegal.
Get that straight.
Housings trend down is about to accelerate. We have not bottomed. We are not yet close to a bottom. Think about what a continued downward grind will do to the banks. Think about the hazard in the Feds efforts to stabalize a massively overbuilt and overbought sector. Every family they convince to buy is made into a sucker. Same with asset inflation and creating a low volatility momentum buyers environment. The Fed via easy money, failing to be straightforward about the shadow inventory risk to buyers, and discouraging saving, is setting up the ultimate challenge to the institution.
The Fed is the leader of lemmings.
From a value stand point, you are correct. Demand, however is stable and may even accelerate. The question is, will it be enough?
www.SouthGaRealEstateReport.com
Some demand is stable - maybe even accelerating. Some.
By and large, sfr and lux RE are in the toilet. Some zip codes are better than other, example: Phila is firming up while Baltimore is crashing. Also, increased pressure from rising municipal/school taxes will hold back gains as well.
When the averages are made it will show a continuing downward pricing trend in suburbia.
The rent is still too damn high
Hard, but not impossible ... just read Clive Crook or any one of several other authors in the Financial Times editorial pages.
come on miost are rather good, clive crook is the worst though, and I haven't seen him there in a while. I think somebody just used to give him talking points that he spouted back, and did no thinking on his own. worse are the disgraced writers of the a-list (which I think stands for asshole) summers, greenspan, etc. they have managed to collect a number of voices that if we lived in a just world the people would have been placed in a siberian labor camp.
They have gottn better from a few years ago, and are mpore willing to admit the dismal science is really dismal, but they still refuse to acknowledge that much. That may be due to advertising dollars, and in general the staff writers seem to have adopted as truths the standard market nonsense.
I will say I have written and gottn replies from a number of them, andthey appear honest and rather open to ideas. John Kay and plender are very good, So is that guy on monday who writes in the second section (jackson? )
Throw your hands in the air and enjoy the ride!!!
The ongoing saga of saving the TBTF Banks while leaving the real economy to wilt on the vine continues as Bernanke pegs inflation at 2%.... further economic damage will eventually lead to a strong public reaction and constructive change, albeit via a highly troubled and sometimes dangerous path.... - Keep Bailing
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Much of the Presidents State of the Union's Mortgage "Fix" was the same "Fix" offered 3 years ago in the same speech. With housing prices down significantly since then, how's that working for you? And, to offer up a task force to prosecute fraud that has continued throughout his first three years is a Hegelian Dialectic ploy, which was pretty much the theme of the whole speech... more big government is needed to fix the problems of an over bloated and infective government. Some day we may get it. - The Presidents Belated Mortgage Fraud/Crisis Investigation
There is an obvious solution to the residential housing market problem that is evolutionary and inevitable that would avoid most of the problems associated with home ownership , mortgages, property taxes, high insurance /maintanance costs and perfect for low income families. Specifically everyone will eventually be forced to liquidate their real estate holdings at distress prices and with whatever cash you may have Buy a Mobile Home !
Whala--- no more property taxes, move to any State you wish several times a year , become part of the trailer park generation , avoid State taxes, move to Canada or Mexico anytime to avoid tax collector, enjoy outdoors at National parks, beaches and resort towns. Best of all park you mobile home in towns where all those billionaires live so they can see what they have created. In other words , America is becoming a Vagabond Society and no one seems to care. Why should you ?
This what happens when Fed Gov't is given carte blanche to spend. Academics like Sgt Wilco here are conditioned to petition $$ from the Fed Gov't in order to justify his 200k salary. He knows nothing else.
Wilco does not want to think in terms of free market, because the free market only supports those that produce. Now if Wilco "produced" great free market thinkers from is student pool then he would be rewarded as such.
Wilco and Krugman are cob webbed thinkers with only the "collective" a constant variable in all opf theie proposed solutions.
Well, what do you expect from "Clowns" that are NOT on Acid?
I trying to figure out what is wrong with free markets and why we need to twist the dials all the time.
Jihadis of the left? Ha! Don't make me laugh, America has no left. What you call "left" would barely qualify as "centre" for most of the world (those who didn't think they were "righty" enough). The leftiest you got is Amy Goodman...
How Obama is going to aide the banks at the expense of your 401k.
http://garereport.blogspot.com/2012/01/loan-modification-plan-actually-gives.html
That doesn't sound leftie to me... In fact it sounds quite right. Taking money from the common to give to the connected-private. If you're leftie, you'd go for the opposite IMHO.
Left and right are different in the USA, just like Red and Blue.
The USA is EXCEPTIONAL.
"In effect, Wilcox is suggesting that we stimulate the housing market by creating a whole new army of poorly qualified buyers."
Hey, Barry's counting on a whole army of barely qualified voters come this November. What better way than to recruit them out of a new army of poorly qualified new homebuyers!
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Much of the Presidents State of the Union "Mortgage Fix" was the same "Fix" offered 3 years ago in the same speech. With housing prices down significantly since then, how's that working for you? And, to offer up a task force to prosecute fraud that has continued throughout his first three years is a Hegelian Dialectic ploy, which was pretty much the theme of the whole speech... more big government is needed to fix the problems of an over bloated and infective government. Some day we may get it. - The Presidents Belated Mortgage Fraud/Crisis Investigation
Actually better to put the assets in strong (landlord) hands.
This sets a floor price based on tax free yield, prices will begin to rise, then the real estate disease (buy as big a house as you can nearly afford) will metastasize yet another time.
Just offer accelerated depreciation like they did in 1981.
Don't you know that the NYT has a special "academic" curriculum for dodo's like these "columnists"?
Stop all government handouts, bailouts, backstops, subsidies, etc....PLEASE.
Until they get all this fraud shit patched up everybody should just stop payin'
That's gonna be a while...lol.
Well played, Akerman, well played.
Is it too much to ask that before some academic asshole comes up with a proposal for how to fix the housing problem or our debt problem or our jobs problem or some problem that they have been trying to fix for who knows how long, that they have some real-world experience in running a business (real not virtual), creating actual jobs, dealing with employees, meeting a payroll, paying taxes and putting in the long hours that entrepreneurship requires?
There is only so much that can be understood via equations and models from academia. You have to get your hands dirty.