The Problem Is Still Falling House Prices
The solution is reversing deficit spending
| Losing their home is a prospect growing stronger for millions of families, figures the Wall St Journal of October 4, 2008. The writer responding is a professor of economics at the University of California - Riverside. |
by Dr Mason Gaffney
WSJ: The prospect of a downward spiral of house prices depresses the value of mortgage-backed securities and therefore the capital and liquidity of financial institutions. Experts say that an additional 10% to 15% decline in house prices is needed to get back to the prebubble level. That decline would double the number of homes with negative equity, raising the total to 40% of all homes with mortgages. The mortgages of five million homeowners would then exceed the value of their homes by 30% or more, which could prompt millions of defaults.Dr. Gaffney: Ever since the U.S.A. adopted the personal income tax in 1913, housing has been a great tax shelter. Its imputed income is untaxed, while interest on mortgages is deductible, and unearned increments on the land under housing are seriously under taxed in a dozen or more ways. The arrangement has been and is bipartisan. The result has been a massive over-allocation of the nation's capital stock to housing. We are "over-housed America".
The little people get a cut of the action, enough to nail down their votes, but it's the big people who own several mansions apiece in the choicest locations. Ever since labor got the vote in the mid-19th Century, politicians have fostered la petite propriete as a bulwark to protect la grande propriete from the rabble.
In the 1920's, popular music manifested the ethos: "My Blue Heaven"; "Robins and Roses"; "Tea for Two" - to be followed, all too soon, by "Buddy, Can You Spare a Dime?"; "With Plenty of Money and You"; "I've got Plenty of Nuthin'"; "In the Big Rock-Candy Mountains"; and "Hallelujah, I'm a Bum".
Fast forward to 2001. All the investment gurus told us to buy a home or two, it's the last tax shelter. And so we did, from cookie-cutter tract houses to McMansions to palaces and compounds for the super-rich, and bankruptcy-safe havens in Florida and a few other states, even Kansas, that protect residences from bankruptcy proceedings. If all this is supposed to protect family life you would not know it from our soaring divorce rates, so Tea for Two becomes tea for one each in two residences.
Now, there's not "too much housing" in an absolute sense. Many folks at the bottom are under-housed. It's rather that housing for the housing hogs takes capital away from other uses, and sequesters it in unrecoverable form. Housing pays out slowly at best, and a 30-year mortgage ties up the lender's capital in a highly visible and countable way. A bank can't make new loans much faster than it recovers capital from the old ones. So we reach a point, as now, where new loans are hard to come by -- to meet payrolls, buy materials, and produce the daily needs of life.
But remember, that's "at best". At worst, builders glut the market, values drop, and the capital is not even recovered slowly, it's down the drain forever.
This is not just a domestic matter. Wall St has been peddling these mortgages all over the world, and the international bills are coming due. We need to export more, but we can't export the surplus houses, and we can't recover the capital. That's where we are today.
So what is Congress proposing along with the bailout? More of the same. This does not augur well.
How can we raise the capital we need now? You may not like this, but it's time to get tough, it's survival time for the U.S.A. We can raise vast amounts of capital quickly by, are you ready? paying down the national debt, saving money on interest payments, and making our remaining bonds worth more to investors. We have to do it soon anyway, but now is the time. Having the feds borrow less also redirects capital back into the private sector. Of course it means taxing more and spending less. But if you have a better idea, let us all know right away!
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Also see: Taxes too low, billionaire says; raise them on land, central banker says.
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