American Gerontocracy

Generational Warfare In Our Time

Samuelson’s Spot-on Take on the Housing Bailout

In this article, Robert Samuelson hits the nail on the head, describing exactly why a housing bailout is not only unfair, but bad for America.

“About 50 million homeowners have mortgages. Who wouldn’t like the government to cut their monthly payments by 20 percent or 30 percent? But Frank’s plan reserves that privilege for an estimated 1 million to 2 million homeowners who are the weakest and most careless borrowers. With the FHA now authorized to lend up to $729,750 in high-cost areas, some beneficiaries could be fairly wealthy. By contrast, people who made larger down payments or kept their monthly payments at manageable levels would be made relatively worse off. Government punishes prudence and rewards irresponsibility. Inevitably, there would be resentment and pressures to extend relief to other “needy” homeowners.

The justification is to prevent an uncontrolled collapse of home prices that would inflict more losses on lenders — aggravating the “credit crunch” — and postpone a revival in home buying and building. This gets the economics backwards. From 2000 to 2006, home prices rose by 50 percent or more by various measures. Housing affordability deteriorated, with home buying sustained only by a parallel deterioration of lending standards. With credit standards now tightened, home prices should fall to bring buyers back into the market and to reassure lenders that they’re not lending on inflated properties.

If rescuing distressed homeowners delays this process, the aid and comfort that government gives some individuals will be offset by the adverse effects on would-be homebuyers and overall housing construction. Of course, there are other ways for the economy to come to terms with today’s high housing prices: a general inflation, which would lift nominal (but not “real”) incomes; or mass subsidies for home buying. Neither is desirable.”

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April 2, 2008 - Posted by | Housing

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