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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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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.
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....
Apt analogy. And the one-person show doesn't count.
NYT goes Full Retard.
Never go full retard, man.
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...
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.
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/
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...
another plan to pass billions in losses to the taxpayers while handing out more zero down houses to people who cannot afford them.
more KY, please.
The Fed just announced unlimited free money for banks through 2014. Why not free houses for anyone who can fog a mirror?
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.
Shouldn't this drive real estate values up?
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.
We still have health care and college costs to satisfy your Jones. Never fear the Bernank is here!
"the Bernank" ??
You mean Corzine's cue-bald, moronic brother?
Half brother. Bernanke has a beard.
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.
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.
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.
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".
Exactly, plus these people are doubly fucked when they need to move to get a job and can't sell their house.
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.
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..
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.
^ this
Amen, Richard.
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.
Go long on "I'm with stupid --->" t-shirts... with an NYT logo... the queue next to Krugman is getting longer...
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.
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.
ENTER...THE REAL 2008! "God help me....but I do love it so....
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?
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.
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.
Thanks, blunderdog. I think I get it now! ;-))
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.
Theoretcially speaking, meddling works.
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.
Krugman makes a killing (figuratively and literally) by trading these economic manipulations.
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.
I Have been looking for the exact words you just used.
Pilot-induced oscillation.
Krugman is in favor of absolutely anything that allows .gov to prevent market forces from coming into play, seriously. Nice piece Rick.
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.
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.
+1... Bingo...
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
$212K + does not include his consulting fees, TV appearances, etc...does it?
"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.