This page has been archived and commenting is disabled.

A Really Bad Plan for Reviving the Housing Market

RickAckerman's picture




 

 

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.

 

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Thu, 01/26/2012 - 20:41 | 2101354 The Alarmist
The Alarmist's picture

They should at least be required to buy a distressed house and either rent it out or flip it so that they have an understanding for the dynamics of the current market.

Thu, 01/26/2012 - 16:04 | 2100662 BidnessMan
BidnessMan's picture

Very much like sex. You can read about it, make up theories about it, listen to other people talk about it, and speculate about it. But until you have actually done it, you have no idea....

Thu, 01/26/2012 - 16:25 | 2100722 Jena
Jena's picture

Apt analogy.  And the one-person show doesn't count.

Thu, 01/26/2012 - 15:06 | 2100472 Seize Mars
Seize Mars's picture

NYT goes Full Retard.

Never go full retard, man.

Thu, 01/26/2012 - 20:41 | 2101351 Problem Is
Problem Is's picture

Why not?

Obama Bin Lyin' went full retard...

Eric "Empty Suit" Holder went full retard...

The Bernank went full retard...

Corzine went full retard...

Timmah Jeethner has ALWAYS been full retard...

Look where it got those guys...

Fri, 01/27/2012 - 21:39 | 2104632 cdskiller
cdskiller's picture

You forgot a couple of other people that went full retard-

Bush, McCain, Gramm, Leach, Bliley, Greenspan, Paulson, everyone who voted for the Commodities Futures Modernization Act, everyone who voted to authorize the war in Iraq, every bank executive whose retardation was saved by the retards who voted for TARP, every Republican who doesn't believe banks should be regulated despite the damage they caused, every retard who doesn't realize that credit default swaps have to be banned or the mortgage backed securities market will always go toxic.

I could go on.

Thu, 01/26/2012 - 14:55 | 2100431 Dermasolarapate...
Dermasolarapaterraphatrima's picture
When the global housing bubbles collapse like a row of dominoes – Canadian housing bubble at apex. Real estate markets from Australia, UK, Italy, and Ireland now into correction phases.

 

 

 

Never in the history of our modern economic system have we had coordinated housing bubbles rage across the world like some sort of financial plague.  The proliferation of boiler plate media and the ubiquitous spreading of banking debt made the real estate religion spread quicker than any time in the past.  The way real estate was being played up in the media was like some sort of spiritual revival.  I remember a colleague showing me a clip of a real estate seminar in California at the peak of the bubble where people looked as if they were in some sort of glorified peyote induced trance.  At the core of any mania is human psychology and herd behavior.

 

 

continued at:

http://www.doctorhousingbubble.com/

Thu, 01/26/2012 - 17:33 | 2100907 James-Morrison
James-Morrison's picture

After the crash of the Tulip bubble, bulbs traded at 1/100th of their peak bubble value. 

For a median valued house that would imply a price of about $2,000-2,500.

Maybe that is Bernanke's goal and ZIRP will be in place until we de-value to that level, to infinity and beyond...

Thu, 01/26/2012 - 14:34 | 2100346 Dermasolarapate...
Dermasolarapaterraphatrima's picture

another plan to pass billions in losses to the taxpayers while handing out more zero down houses to people who cannot afford them.

Thu, 01/26/2012 - 17:06 | 2100837 847328_3527
847328_3527's picture

more KY, please.

Thu, 01/26/2012 - 16:08 | 2100675 BidnessMan
BidnessMan's picture

The Fed just announced unlimited free money for banks through 2014. Why not free houses for anyone who can fog a mirror?

Thu, 01/26/2012 - 19:58 | 2101258 Rainman
Rainman's picture

And now residential sellers don't have to hope anymore for a housing panic buy based on rising rate fears for nearly 3 years. Buyers might as well sit, save and wait for the prices to come roaring down, thanks to ZIRP on roids. This time Bernank really fucked up. Now we are really on our way to 230% debt/GDP.

Fri, 01/27/2012 - 09:31 | 2102122 Chief KnocAHoma
Chief KnocAHoma's picture

Shouldn't this drive real estate values up?

Thu, 01/26/2012 - 13:59 | 2100194 SillySalesmanQu...
SillySalesmanQuestion's picture

But, but...the rigged casino needs a new bubble game....all other bubbles have been exhausted and or burst, that is except, for the daily melt-up on no volume.

Thu, 01/26/2012 - 15:52 | 2100629 VelvetHog
VelvetHog's picture

We still have health care and college costs to satisfy your Jones.  Never fear the Bernank is here!

Thu, 01/26/2012 - 20:37 | 2101344 Problem Is
Problem Is's picture

"the Bernank" ??

You mean Corzine's cue-bald, moronic brother?

Fri, 01/27/2012 - 12:09 | 2102647 VelvetHog
VelvetHog's picture

Half brother.  Bernanke has a beard.

Thu, 01/26/2012 - 13:48 | 2100141 RichardENixon
RichardENixon's picture

Median housing costs need to fall to a level where a median salary can afford them. The way salaries are probably headed in the U.S., the median house price should probably drop to around $75,000. Any attempts to interfere with this process will only result on more pain. It is really so much simpler than people like Berekely professors think it is.

Fri, 01/27/2012 - 04:35 | 2101897 geekgrrl
geekgrrl's picture

Exactly. You summarize the basic problem perfectly.

I've been thinking exactly the same thing for the last four or five months. I'm actually in the market to buy, but between government subsidies and price distortion resulting from mark-to-unicorn, the end result is an artificial floor under housing prices. To me, this looks like a feature of the ponzi because pension funds rely on MBS's, which rely on housing values. So if housing prices do revert from $210K on average to $75K (and they would, were there a free market and banks were forced to mark to market, i.e. dump the shadow inventory) my sense is that the baby boomers would be looking at no pensions. Same for Gen X, Y, Millennials, and all the rest till the end of time.

Thu, 01/26/2012 - 17:37 | 2100917 James-Morrison
James-Morrison's picture

That is probably close.  My father bought his house for $14,000 and his yearly salary at the time was about $12,000 -- and that was a union job.  

Thu, 01/26/2012 - 16:29 | 2100734 ilovefreedom
ilovefreedom's picture

Yep. I am not buying a house with a 75-150k value for 350-500k.

General opinion is that because rates are low its a great time to buy, nevermind you could lose 30-50% or more if the economy really starts to eat shit.

I've been looking at historical examples from Japan as they are 10 years ahead of the US for the "lost decade"

Imagine buying a condo for $500k and after 17 years you still owe $120k and the place is worth $200k. THAT is the situation potential buyers face today.

Not to mention possibly declaring bankrupcy inbetween to get out from under that debt.

Yeah rates will probably be higher in the future, but who cares if the house costs half as much.

You still have average people looking to buy properties to rent with little or no down because "rents are higher than morgages".

Fri, 01/27/2012 - 02:38 | 2101838 SoCalBusted
SoCalBusted's picture

Exactly, plus these people are doubly fucked when they need to move to get a job and can't sell their house. 

Fri, 01/27/2012 - 00:18 | 2101679 Fred Hayek
Fred Hayek's picture

Doctor Housing Bubble cites a 3:1 ratio of median home price to median household income as the historic stable ratio. That ratio is still exceeded almost everywhere in the U.S. And wages are not rising. If anything, they're falling. Any effort to maintain or raise housing prices is the equivalent of shoveling sand on the beach to try to prevent the tide from coming in.

Thu, 01/26/2012 - 17:09 | 2100842 847328_3527
847328_3527's picture

ilovefreedom, best post of the day!

The best time to buy a house is when they are affordable, the purchaser has cashola AND a job. Low interest rates are a minor factor. When rates start going up, house prices will plunge. That's another reason why we will see ZIRP until 2020 or longer..

Thu, 01/26/2012 - 15:14 | 2100492 RopeADope
RopeADope's picture

If the utility value and speculative value of houses were slit apart into different instruments then houses would be affordable. Unfortunately the shadow banking system has turned title of the properties into worthless paper that no one has a clue what belongs to whom.

Existing underwater mortgage holder gets new loan at utility value. Bank, Freddie or Fannie retain 10, 20 or 30 year option on property with Bernanke's 2% inflation rate baked in to the price. Banks do not have to write down the loss on the house since they have an option with value attached to it. Since true inflation is much more than the 2% the banks still get to profit obscenely from FED policy. You would also need to establish a pricing mechanism for these options so the homeowner has the right to repurchase them at an agreed upon pricing schedule.

Thu, 01/26/2012 - 15:02 | 2100455 WallStreetClass...
WallStreetClassAction.com's picture

^ this

Thu, 01/26/2012 - 14:48 | 2100409 Dermasolarapate...
Dermasolarapaterraphatrima's picture

Amen, Richard.

Thu, 01/26/2012 - 13:40 | 2100103 BlankfeinDiamond
BlankfeinDiamond's picture

I apologize for veering off course of the subject but Henry Kissinger was a much worse choice for the Nobel Peace prize than Arrafat. His war crimes were nearly Stalinesque.

Thu, 01/26/2012 - 13:39 | 2100102 The Wolf
The Wolf's picture

Go long on "I'm with stupid --->" t-shirts... with an NYT logo... the queue next to Krugman is getting longer...

Thu, 01/26/2012 - 13:28 | 2100033 ex VRWC
ex VRWC's picture

If insurance against house price declines in an area is a good thing, then let the market provide it to people, with no government involvement. Lets have insurance companies with no government guearantees and no implied bailouts offer this.   If the market won't do it, then the government has no business becoming involved.

 

Thu, 01/26/2012 - 13:24 | 2100018 Whoa Dammit
Whoa Dammit's picture

Only the investment banks, who are now getting sued right and left by pension funds that purchased MBS, will benefit from any government program to revive the housing market.

Thu, 01/26/2012 - 13:21 | 2100007 disabledvet
disabledvet's picture

ENTER...THE REAL 2008! "God help me....but I do love it so....

Thu, 01/26/2012 - 13:17 | 2099989 Omen IV
Omen IV's picture

the solution offered of insurance against price decline - has nothing to do with credit standards - so why are you focused on that in your critic - unless the professor is also asking for lower standards?

the banks have inventory which is not written down to market - the reason is the market if adjusted for the shadow inventory would drive the market price lower - and bankrupt the banks phony Balance Sheet - to jump start the concern of the millions of potential buyers especially new owners - on the sidelines who are credit worthy - an insurance may provide the necessary momentum for others to join the market once they see market stabilization who are risk adverse to further decline and therefore get the market moving

this is not the same as lower credit standards - in addition you still also have the backstop of an appraisal which the lender and the insurer would control

so what dont i understand that you do?  

Thu, 01/26/2012 - 16:11 | 2100678 11b40
11b40's picture

I'm trying to figure out why we want to prevent bankrupt banks from becoming...well, bankrupt?  Have we not saddled our children with enough debt already trying to prop up these dispicable entities?

Bring back Glass-Stegall, turn banks into utilites, and get this whole socialized losses' thing out of the system.  Bankrupt is 'bankrupt....financial or moral.

Thu, 01/26/2012 - 17:56 | 2100977 blunderdog
blunderdog's picture

I'm trying to figure out why we want to prevent bankrupt banks from becoming...well, bankrupt?

Because no person (meaning corporation or government) can cover the losses.

In a system in which the laws are the priority and the wealth-flows are secondary, the obvious and simple solution is the easy one.  The banks get wiped out and restructured.

But the wealth-flows have been the *primary* driver of government policy since at least the early-mid '90s.  It's far more important to keep the banks operating than it is to worry about the 90% of people affected by things like unemployment, inflation, starvation, etc. 

After all, the 90% don't have shit, so they can't really finance a political campaign.

Sat, 01/28/2012 - 12:51 | 2105467 11b40
11b40's picture

Thanks, blunderdog.  I think I get it now!  ;-))

Thu, 01/26/2012 - 13:57 | 2100184 Liquid Courage
Liquid Courage's picture

So ... let's see: If A increases B which is inhibited by D and E taken together with an oscillating F, then if we enhance B then ergo, cetis paribus ..... C'mon, man!

What you don't see is that it was meddling by too-clever-by-half Economists that caused the problem in the first place.

Fri, 01/27/2012 - 18:10 | 2104034 twotraps
twotraps's picture

Theoretcially speaking, meddling works.

Fri, 01/27/2012 - 00:11 | 2101669 Fred Hayek
Fred Hayek's picture

Yup. Shortly after he was done doing consulting work for Enron, Krugman was quoted explicitly, yes explicitly, urging Greenspan to create a housing bubble to prevent a recession circa late 2001 early 2002.

He got his wish and the consequences have been catastrophic.

But let's play God some more. I'm sure no negative, unintended consequences will result from it this time just because they did every other time.

Fri, 01/27/2012 - 18:01 | 2104019 andyupnorth
andyupnorth's picture

Krugman makes a killing (figuratively and literally) by trading these economic manipulations.

Thu, 01/26/2012 - 13:03 | 2099927 Mad Max
Mad Max's picture

The stupidity is strong in this one.

 

I look at the various dumb ideas for fixing the economy and have to think that tinkering with the economy is akin to getting back under control a car that's fishtailing on icy roads.  You make one, small, careful correction, then you sit back with thumbs crossed hoping it works.  Multiple corrections usually makes each skid stronger in an increasing oscillation that ends with your car in the ditch or smashed into a tree.  Which is where the US economy is going quickly.

Thu, 01/26/2012 - 18:12 | 2101014 mtomato2
mtomato2's picture

I Have been looking for the exact words you just used.

Thu, 01/26/2012 - 13:50 | 2100154 XitSam
XitSam's picture

Pilot-induced oscillation.

Thu, 01/26/2012 - 13:01 | 2099922 Stax Edwards
Stax Edwards's picture

Krugman is in favor of absolutely anything that allows .gov to prevent market forces from coming into play, seriously.  Nice piece Rick.

Thu, 01/26/2012 - 13:37 | 2100086 Liquid Courage
Liquid Courage's picture

Yeah, reality can be such a ... y'know ... bummer. All we need is more digi-paper promises to create that endless boom and turn those stones to bread and all that good stuff.

Except: the boom causes the bust and the faltering Keynesian flock does not have the stones to admit they've inverted cause and effect ... so it's always more ... just another trillion or so and we shall be vindicated and lead the poor ignorant masses to the promised land.

Poor ol' Stax died before his time. Personally, I'd like to see Krugman in an Editorial meeting having to deal with that other Samuel L character Jules from Pulp Fiction:

Check out the big brain on Paul ... Oh, I'm sorry, did I break your concentration? ... I will strike down upon thee with great vengeance and furious anger those who attempt to poison and destroy my brothers. And you will know I am the Lord when I lay my vengeance upon you.

Now for a tasty beverage.

Thu, 01/26/2012 - 12:57 | 2099909 ebworthen
ebworthen's picture

One need only look to the debacle that is Fannie Mae/Freddie Mac to see where these Keynesian rabbit hole schemes lead the society.

It is the Mad Hatter's Tea Party, with Krugman in the starring role.

Thu, 01/26/2012 - 20:33 | 2101340 Problem Is
Problem Is's picture

+1... Bingo...

Thu, 01/26/2012 - 12:52 | 2099897 Stuck on Zero
Stuck on Zero's picture

James A. Wilcox, Prof. UC Berkeley Total pay: $212,766.71 for 2010.

Education

BA, Economics and History, Binghamton University
PhD, Economics, Northwestern University

Positions Held

At Haas since 1978
2009 - present, James J. and Marianne B. Lowrey Chair in Business
1978 - present, Professor, Haas School of Business
1999 - 2001, Chief Economist, Office of the Comptroller of the Currency, Washington, DC
1995 - 1997, Chair, Finance Group, Haas School of Business 
1991 - 1992, Economist, Federal Reserve Board
1990 - 1991, Senior Economist, President's Council of Economic Advisers

Fri, 01/27/2012 - 14:39 | 2103266 847328_3527
847328_3527's picture

$212K + does not include his consulting fees, TV appearances, etc...does it?

Thu, 01/26/2012 - 13:24 | 2100014 Don Birnam
Don Birnam's picture

"1990 - 1991, Senior Economist, President's Council of Economic Advisers"

...That would be on Poppy Bush's watch.

Once again, illustrating the truism that there is not a dime's worth of difference between the Democrat and Republican parties.

Do NOT follow this link or you will be banned from the site!