FEDERAL POLICIES bear some of the blame for the housing bust because they encourage leveraged bets on housing. Yet instead of reconsidering the public incentives that encourage real estate gambling, the federal government seems ready to double down, with another $35 billion in Treasury support for state agencies that subsidize borrowing, and the reauthorization of an $8,000 home buyer’s tax credit. The ship of state would do better to turn around and reduce borrowing subsidies, by lowering the million-dollar cap on the home mortgage interest deduction. ...
Encouraging spending on housing induces people to buy larger and larger homes, which use more energy and create more carbon emissions. The threat of global warming warrants policies that encourage smaller homes. ...
Subsidizing home buying does increase prices, but that just transfers money from poorer home buyers to richer homeowners. Public policy shouldn’t try to make cars or clothes more expensive, and it shouldn’t try to reduce housing affordability either. ...
Supporting homeownership is sometimes advocated as a means of encouraging asset accumulation, but it makes little sense to encourage investing in one particular asset class. A diversified portfolio is always safer than a leveraged bet on one particular home. ...
A tax credit for first-time home buyers would be reasonable if the credit was a substitute for policies that subsidized borrowing. If America wants to subsidize homeownership, then a flat tax credit makes more sense than a credit that scales up with the size of one’s mortgage. ...
Our policies should encourage people to live in housing they can afford, not to borrow as much as possible.
Monday, October 05, 2009
Ed Glaeser partially blames government for the foreclosure crisis
From Harvard economics professor Edward Glaeser:
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I couldn't agree more with your article. It's just insane to continue to feed the monster that is the cause of our problems. It's like continuing to give a gambler money even though he keeps losing it. When will it stop? or more importantly what needs to happen before the government realizes it needs to stop?
ReplyDeleteThis article is great. It says everything I've been screaming for years.
ReplyDeleteOf course, the "housing affordability" reason for subsidies is just a cover for the real reason: It's what the federal government's puppetmasters (i.e., banks, Realtors, mortgage brokers, etc.) want.
Well said. Enough is enough. What happened to working for what you get and if you can't afford it then don't buy it. Everyone is so busy keeping up with the Jones's.
ReplyDeleteI agree with the article but not with your headline "Ed Glaeser blames government for the foreclosure crisis".
ReplyDeleteWhat the very first sentence says is "FEDERAL POLICIES bear some of the blame for the housing bust because they encourage leveraged bets on housing". I think the word "some" is pretty critical. I would say that other factors were far more important. I've detailed those factors before so I won't bother to go through them again now, but I would say the way you framed the article with your title reveals a bias in your analysis. I believe, and I may be wrong, that you're a self proclaimed libertarian. This seems to lead to a desire on your part to blame every problem on government policies while downplaying the role of a poorly regulated, often dishonst and badly incentivized private sector. I don't want to sound a$$holey, since I think your posts and analysis are generally very good, but I still wanted to bring it up.
kahner,
ReplyDeleteYour criticism of the headline is valid and I don't consider it "a$$holey".
Although I am libertarian, I think there's plenty of blame to go around. I actually put most of the blame on home buyers themselves, because people should be responsible for their own actions. Nobody forced home buyers to overpay for a home. That was their own decision. Many buyers saw rapidly rising home prices as a way to get rich quick. If prices are going to keep going up rapidly, then in a buyer's eyes the current price becomes irrelevant. Ultimately, it is this get rich quick mentality that causes all bubbles, and all bubbles crash.
Regarding the headline, however, keep in mind that headlines should be short and sweet. This headline was already longer than I'd like because it ran beyond a single line. It is hard to add nuance to a headline while still keeping it succinct.
all of you above are, in essence, implying that we cannot spend our way out of debt. How Un-American!. You need to be reported to the proper authorities.
ReplyDeleteLenders are to blame. Let's be honest here, what are the chances that a lender that has employees with MBA's got "fooled" by a homeowner getting a liars loan?
ReplyDeleteAbsolutely zero. Liar loans are called that because the lender was the liar, not the borrower.
Private industry loves to take short term risks in an environment of extreme deregulation and thats exactly what happened.
No need to buy a home. Just rent and not worry about it. Avoid the housing trap. The government will do anything to put people into money drains. There is nothing like knowing that you are not committed to living in a place for 20 or 30 years. But I guess there are those of you out there who feal inept as a human being unless you have a mortgage wrapped around your neck. Good luck!
ReplyDeleteKahner is totally on target.
ReplyDeleteBy far the best article on this entire fiasco was Simon Johnson in the Atlantic Monthly talking about the "FinancialOligarchs". A great quote (Paraphrase) was something to the effect of: "during this 30 peroid of asset bubbles and speculation, whether policies came from the political right or left, they all shared the commonality of being benificial to Wall Street"
Classic case of complete regulatory capture by Wall Street
http://www.theatlantic.com/doc/200905/imf-advice#
James, thanks for addressing my comment. Its nice to have a venue for honest, intelligent, reasonable discussion.
ReplyDeleteTo some degree I also think that buyers are largely to blame. I think we part ways somewhat based on our political/economic philosophies. I basically think most people are not very bright and as much as the average buyer is "responsible" for poor decisions we can't just assign blame and move on. To maintain economic stability and prevent the more sophisticated person or company from running amok, goverment regulation and intervention is required. I think its clear that members of the financial industry knew exactly the kind of ridiculous mortgages they were approving and creating. They knew it was a manic bubble. They knew it would crash and create a economic disaster. The average buyer just knew they had to get in the market NOW before they got priced out FOREVER and then they'd get rich flipping. So both sides are to blame, but one side created this mess in ignorance while the other side acted in purely bad faith. I don't believe bubbles are non-preventable. I def don't buy the argument many make that no one can see its a bubble till after its over and the government can't act to stop or moderate bubble mentality. So that's my 2 cents for today.
Let us keep in mind, while lenders and borrowers were the ones directly responsible for making, taking, and breaking these idiotic loans, it was the government and the Fed that provideded them the incentive and impetus for doing so.
ReplyDeleteThe major lenders have a put from Uncle Scam, so no matter how self-destructively they act, they will never have to bear the consequences of their actions. Privatize the gains -- socialize the losses.
I guarantee, if these lenders faced the actual possibility of failure, they would have thought twice before making these loans in the first place. (Same goes for investment banks, bond insureres, homebuilders, and all the other machinery necessary to facilitate the lending).
There is blame to go around, but affording greater power to fedral regulators to micromanage the housing industry does not jump out at me as the obvious solution to these problems. Let's start by allowing the stupid and reckless to fail.
Good op-ed in Time Magazine today:
ReplyDeleteRising prices are always good news, though, for real estate agents, mortgage lenders and homebuilders. The higher prices go, the bigger their cut of the action. These groups are powers in Washington. The National Association of Realtors gave more money than any other group to candidates in the last elections ($4 million), according to the Center for Responsive Politics, and its 1.1 million members can do a lot of lobbying. Hence the subsidies for homeownership that never go away. In 1961 departing President Dwight Eisenhower warned of "the acquisition of unwarranted influence" by what he dubbed the military-industrial complex. Maybe it's time to call out the real estate — industrial complex.
more here:
http://www.time.com/time/magazine/article/0,9171,1927288,00.html?xid=rss-topstories
There is blame to go around, but affording greater power to fedral regulators to micromanage the housing industry does not jump out at me as the obvious solution to these problems. Let's start by allowing the stupid and reckless to fail.
ReplyDeleteWhat part of "too big to fail" do you not understand? You can either prevent key organizations from growing that large (via regulation), or constrain their behavior (via regulation).
But the idea that something like AIG could be allowed to collapse unchecked is naive in the extreme.
OT question: When looking at local real estate statistics (http://www.pgcar.com/stats/default.htm for example) would the inventory:settlements ratio be more indicative of the market than inventory:contracts? Perusal of the stats shows many more contracts than settlements; am I correct that these primarily are people who fail to get financing? It's a big effect in PG county now.
ReplyDeletewould the inventory:settlements ratio be more indicative of the market than inventory:contracts?
ReplyDeleteYou should ask the Stats Gurus over at Nova Bubble: http://novabubblefallout.blogspot.com/
Ask either Cara or CRT as they seem to be the resident experts over there. A word of warning - they dont sugarcoat - they tell it the way it is as opposed to what we (sitters) want to hear. I hate them for that :0
I don't know if I would blame the government entirely. A part goes with the companies like Countrywide, Ameriquest and others that gave no doc loans and found ways to give more in underwriting than what makes good lending sense. Instead they looked at the bottom line and charged lots of money up front to customers that had "bad credit" and made their money from that. These companies were huge!
ReplyDelete