Friday, February 06, 2009

Down the Drain

The Senate on Wednesday voted to expand the economic stimulus package with a tax credit for homebuyers of up to $15,000, a provision championed by Republicans as addressing a root cause of the recession. The tax credit would give buyers 10 percent of the price of a primary residence bought within one year, up to $15,000, and is intended to stabilize plummeting home prices. This single-minded obsession government has with propping up housing values is misguided at best and seriously damaging to the economy at worst. Housing prices have to continue to fall until they are in line with incomes and the government should not do anything to screw around with the natural correction currently going on in the housing market.

The tax credit assumes that people have sufficient liquid resources for a 10-20% downpayment. The US has had a negative savings rate for the last ten years and the value of most people’s investments has been cut by ½ in the last quarter of the last year alone. I doubt too many Americans are sitting on a big wad of cash they feel would be best spent gambling on the unstable housing market right now.

The housing industry needs to downsize. There are over 2,000,000 excess housing units in the US, most of them overpriced. There was far too much construction during the boom. This not only created an excess of housing but also an excess of unsustainable jobs. Having an economy based upon building houses and selling them to each other rather than on the production of tangible goods or innovative technologies is the difference between a consumption economy and a production economy. Consumption economies are inherently unsustainable and bound to fail.

And frankly, the whole ideology of saving the economy by spending was discredited, wasn’t it? We're supposed to spend our way out of this? With what real income? With what credit? Isn't spending imaginary money what got us into this mess in the first place?

“Businesses are panicked and fighting for survival and slashing their payrolls,” said Mark Zandi, chief economist at Moody’s “I think we’re trapped in a very adverse, self-reinforcing cycle. The downturn is intensifying, and likely to intensify further unless policy makers respond aggressively.” The Obama administration needs to stop fucking around with bipartisanship and come up with some drastic solutions to what is fast becoming a spiraling economic disaster. 598,000 jobs were lost in January of this year. A half million jobs. In one month.


Anonymous said...

Now that the Democrats and Republicans have discovered their inner John Keynes and are about to embark on the most profligate spending our Government has ever engaged in, the real panic can officially begin. Ballooning the Federal Deficit while propping up POS securities, maintaining inflated home values while simultaneously destroying the American dollar isn't a recipe for recovery. I'm sure Hoover and FDR would now agree. I want to see Obama succeed but if he continues on this course, his will be a one term presidency.

Mark said...

I am inclined to agree with you. A Keynesian approach probably won't work, then again, supply side economics has been similarly discredited. You can't drop the prime rate to less than zero.

I'm in favor of the government doing little to nothing, except expanding the social safety net and enacting universal healthcare.They cannot just continue to print money and spend our way out, lest we start to resemble some backwards banana republic with hyper-inflation.