Just Shoot Me Now


There’s dumb, there’s insane, and then there’s Stiglitz and Zandi with this bit of tripe:

With principal writedown no longer an option, the government needs to find a new way to facilitate mass mortgage refinancings. With rates at record lows, refinancing would allow homeowners to significantly reduce their monthly payments, freeing up money to spend on other things. A mass refinancing program would work like a potent tax cut.

Refinancing would also significantly reduce the chance of default for underwater homeowners. With fewer losses from past loans burdening their balance sheets, lenders could make more new loans, and communities plagued by mass foreclosures might see relief from blight.

What they’re advocating is a mass-refinancing game ala-HOLC from the Depression.

But there are several problems with this premise.

First, it didn’t work, objectively.  HOLC did nothing to end The Depression.  It arguably made it worse, as it locked people into homes that they should have objectively abandoned and in addition it held the price artificially high, preventing market clearing.

The Depression did not end until we entered WWII.  That worked, but not for the reason commonly believed (the “broken window” fallacy.)  Rather, we both destroyed virtually all of the industrial production capacity in the western world (along with two major cities in Japan) and we killed off a huge number of productive workers.  This made America the “last man standing” from an industrial perspective and we profited mightily from that in the next two decades.

But nobody in their right mind advocates starting a nuclear war in today’s world to do the same thing — right Joseph?

The other part of the “magic” of the 1950s and 60s was, of course, the “boomers.”  That too was a consequence of the war (more specifically, the end of the war) which created a huge boost in family-related things, including houses.  Today such a “baby boom” is anywhere from unlikely to impossible; we have a much higher population density in America today than we did at the time (139 million .vs. 330 million) and resources were comparatively cheap.  Today we have none of those advantages.

The problem Stiglitz and Zandi have with this proposal is that they’re not bothering with the second-level analysis — who is going to buy these homes as they turn over, and with what?

Yet that’s the key.  In the 1950s we had young families coming up from the baby boom’s formation that required housing; there was a strong organic driver of demand, and the converstion of industry from wartime production to peacetime resulted in plenty of jobs and little debt for those who were coming back into the civilian workforce.  The soldier returning home and starting a family did so with little to his name, but he also had little or no debt on his back as well.  Given a good salary he was thus able to support his wife and children — and did.  At the same time the women who had temporarily manned factories making bombs, guns and aircraft during the war returned to the home and raised children.

Today our young people fall into two classes — those who are qualified to pull coffees at Starbucks and those who have college degrees but also come with $50,000 or more in college debt.  Neither is capable of taking on a $1,000/mo house payment, say much less a $2,000 one.

Yet that’s position being put forward.  If we were to “refinance” those “underwater” mortgages we do several things that are bad, not good:

  • We prevent the market from clearing.  Underwater homeowners cannot sell and thus cannot move to where jobs are.  We should encourage, not discourage, market clearing prices.
  • Bankruptcy is a good, not bad, thing.  It is the mechanism by which the losses made when a bad loan is originated are crystallized.  The important thing to remember is that loss happens when a bad loan is made; all acts beyond that point are only an attempt to allocate or defer recognition of that loss, but cannot change the fact that it occurred.
  • Debt loads are too high, and until they come down dramatically there is no market at the current price.  This is the gist of the problem when it comes to housing and everything else.  We have literally poisoned the well with our young people and educational loans; unfortunately this sort of short-sighted policy is all too common among the ivory tower elites, including Stiglitz.  Without a buyer there is no sale!  So who’s the buyer for all these McMansions as the boomers age?  It certainly isnot the young guy or gal with a Sociology Degree and $50,000 or more in college debt — a debt that instantly blows their debt-to-income ratios off the charts and precludes purchase of a house!

In short what we have here is yet another attempt to hold asset prices high in the mistaken belief that this will somehow “help the economy.”  It will do no such thing, as it fails to recognize and deal with the fact that the natural buyer is out of the market due to our policies on educational lending and costs, while at the same time it attempts to bail out the speculator, the foolish and the banksters who wrote the paper, along with those who were foolish enough to buy it.

The fact of the matter is that rates should go up, not down.  The market should be encouraged to clear.  The people who are underwater should be encouraged to abandon their property to the market, wherever it may wind up.  Prices will collapse and inventory will clear.  Those who are overburdened will declare bankruptcy and start over.  Those who foolishly lent money will lose their investments.

But this clearing of the market is the only way out.  At the same time we must stop the inexorable march toward more debt and more leverage everywhere in our society.  College loans must become rare rather than common, educational costs must come down, the abuse of populations and the environment in foreign lands must become more difficult and less profitable and that which we demand of government we must pay for in the present tense.

Until all of those happen there is no durable path forward, arm-waving by hopelessly conflicted and desperate men such as Stiglitz and Zandi aside.

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