I’m Not An Economist, But I Did Stay At A Holiday Inn Express Last Night
By some estimates, the federal government has already committed more than $7 Trillion in loans, asset purchases and guarantees in an attempt to bring an end to the global credit freeze. In spite of this unprecedented spending, there has been no measurable improvement in the state of our economy. The fact that Timothy Geithner was the primary architect of the recent Citigroup bailout is a pretty clear indication that we won’t be seeing any major changes in strategy once the Obama administration takes office. The only plan appears to be throwing more money at a few giant financial institutions in the hopes that increased liquidity will spur lending. So far this strategy has failed miserably.
I’m not an economist, but I did stay at a Holiday Inn Express last night. From my point of view, there is one central issue that we need to address before our economy can begin to recover. We must figure out a way to stabilize the housing market. Dramatic declines in the value of our homes is the primary cause of the global crisis, and until those values are stabilized the problem will not be resolved.
When mortgage balances exceed home values, foreclosures naturally rise, especially in situations where homeowners have little or no equity to begin with. Even if they can afford to stay in their homes, upside down borrowers with damaged credit histories have little incentive to continue making payments. As the rate of foreclosures increases, the value of mortgage backed securities falls. There are simply too many of these highly convoluted instruments in circulation for the government to buy, so it is essential that we figure out a way to stabilize their value. Financial markets will remain paralyzed until then.
The median home price in the U.S. has fallen by over 11% in the past twelve months alone, and in some parts of the country values have fallen 30% or more. The problem is that prices are declining from an artificially high level brought about by irresponsible lending practices that fueled the speculative boom in the first place. Most of the excessive building occurred in California, Florida and Nevada, but we are all paying the price for what began as a series of localized feeding frenzies. Investors in mortgage backed securities are left holding the bag, making them reluctant to take further lending risks. The inability of buyers to obtain financing leads to a glut of homes on the market that drives down sale prices even further. This vicious cycle will continue until lenders are once again willing to make loans to qualified buyers on reasonable terms.
Instead of the continuing to shore up financial institutions with massive infusions of capital, we should consider an alternative approach. The government can provide incentives in the form of tax credits for anyone who purchases an existing home. Incentives can’t work unless buyers are also able to obtain financing, so the government can assist by proving loan guarantees for buyers who meet conventional standards of credit worthiness. These incentives would remain in place until the excess housing inventory is absorbed. Once this occurs, housing prices will stabilize naturally, making it possible to finally determine a realistic value for the troublesome mortgage backed assets.
One of the main problems with the current plans to restore economic order is that there is no mechanism in place to implement them. We’re making it up as we go along and creating new government bureaucracies to figure out how to spend the money. This is incredibly inefficient and creates a significant delay in distributing funds that have already been appropriated. On the other hand, the Veteran’s Administration already has a proven mechanism in place for administering government guaranteed home loans, and since 1944 they have backed over 18 million mortgages. Why not take advantage of an existing program that has worked for decades instead of continuing to fly by the seat of our pants?
See what I don’t get is why are they’re “hoping” the trillions will spur lending rather than “mandating” it be lent to qualified folks. Maybe I’m missing something, but there doesn’t seem to be any strings attached to any of the money that we’re dishing out. That would be like me handing my son a c-note “hoping” he’d put it away for college when. Truth be told, unless I give him explicit directions on what to do with that money, it’s more likely he’s just gonna go to Gamestop and buy a videogame. I am his mechanism. It’s astonishing that the feds haven’t figured out theirs yet.
RnR,
If it makes perfect sense to ordinary folks like us, the feds will probably never figure it out.
Speaking as a layperson, am I incorrect in thinking that home prices were overvalued in the first place, and needed to drop as a corrective measure? If so, wouldn’t it be counter-productive to keep home prices artificially inflated?
Whatever the case, I’d much prefer that this all this federal bailout money be dumped into the system from the bottom-up, rather than the top-down. Why not guarantee troubled mortgages by issuing vouchers to homeowners facing foreclosure? It seems to me that we’d be far better off to keep people in their homes, rather than giving banks a bunch of money to spend will-nilly.
I’m way over my head in all of this stuff, anyway. I just really hit my boiling point when Citibank announced that they had spent $400 million to acquire the naming rights to the NY Met’s new ballpark on the same day that Uncle Sam agreed to pull their collective asses out of the fire.
Ron,
I don’t think there is any doubt that home prices were artificially high in many parts of the country, but they have been falling steadily for the past couple of years. We’re probably at a point where further declines would represent artificial lows.
What about the auto guys spending twenty grand on private jets to fly to the meeting in Washington? It’s going to take a while to reel in these guys. They think they can get away with murder! And why wouldn’t they? They’ve been running amok for years. But I do think things are going to change once the Obama administration gets in. He’s been saying from the beginning that it should trickle UP and not DOWN and just today at his news conference he said things are going to be different. He’s rockin’ and rollin’. Give him a chance.
Oddly, I think we should invest in the ‘middle man’ sector. The ‘trickle down’ philosophy hasn’t worked as well as expected and, honestly, I doubt a ‘trickle up’ will really work any better. What we need is a push to support the mid-level businesses and industries in an effort to provide a ‘bi-linear trickle’. Or, perhaps, an inverse of that same idea, with the push of stimulus plans and other incentives in both ends of the spectrum and let it ‘trickle to the middle’.
Derivatives! The mortgage crisis sparked the Derivatives Crisis.
The collective fall in home prices is nothing compared to the ‘Bets’ floating around waiting to be paid between Financial Institutions. “Lehman Brothers’ bankruptcy threw into jeopardy derivative deals with a staggering 8,000 different firms that had paid Lehman billions of dollars in collateral.”
That’s collateral, not the amount to be paid.
The Fed is throwing money at the Big Banks/Brokerage so the Derivatives owed don’t ‘Collapse The Global Market’.
Housing isn’t the problem.
Muse,
A very large portion of those dubious financial instruments are tied either directly or indirectly to housing values and mortgage default rates.