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Can the subsidy be redirected?
Claire asks me:
If one is going to throw a huge pot of money at solving the crisis, is there any way to give it to anybody ‘lower’ in the chain?
Ideally we could send money to anyone about to default. The obvious problem is that everyone would then pretend to be in that position.
So I have a modest proposal. The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes. Anyone who is otherwise about to default could then sell the home at a high enough price (fingers crossed) to get out of the deal alive. This would stop home prices from falling and it would limit the number of future defaults.
Buying the current already-foreclosed homes also would recapitalize the banking system but if you wanted to punish banks (not my goal) you could just seize the homes. Of course the elasticities may not work out in such a way for this plan to forestall financial disaster but I've heard worse ideas.
And if you want to save the homes from outright destruction, you could offer 20-year, no-resale residencies in the homes to some group that won't otherwise be buying an American home. Alex suggests offering the homes to potential immigrants ("have I got a deal for you...") or how about giving away the homes to current low-asset recipients of Medicaid? Dealing the homes away in the right manner could win back some money for the government or help out others in a very humane way.
Posted by Tyler Cowen on September 24, 2008 at 12:38 PM in Economics | Permalink
Comments
Destroying homes is the stupidest thing! You are trying to save something imaginary (paper money) by destroying something of real value (shelter, warmth, comfort). Please get clear on reality vs money. Same for the financial crisis...if we need the banks to function (their buildings, employees, the services they provide), that can be preserved even while completly resturcturing their paper-based value (such as via government mandated debt for equity swaps, asset pool segregation, ownership changes). It will be a great help to all to help people distinguish physical assets and skillsets (services) from any arbitrary monetary value, ownership structure, or regulatory framework...all of the later can be changed by fiat, while the first ones do represent real, tangible assets.
Posted by: Craig at Sep 24, 2008 12:53:14 PM
Tell Iraq and Israel we are broke and cannot fund their (occupation/defense budgets) anymore. Instead we will buy up all the homes going into foreclosure and the people over there who fell unsafe can move into a home in america as long as each Israeli family can find a Iraqi family it is willing to share the house with. we can then nationalize the TV stations and air the reality shows that we get out of this project. The profits will more than make up for the 1 trillion dollar cost of buying the homes.
Posted by: Gabe at Sep 24, 2008 12:59:12 PM
The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes.
Is this the "broken glass fallacy"?
Posted by: Superheater at Sep 24, 2008 1:00:59 PM
"...The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them..."
Bill Gross had the same policy recommendation: "...Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again...One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again..."
But it's economically inefficient to eradicate the houses just to alleviate the oversupply problem. Uur country's 2 biggest problems right now are the crisis on Wall Street and the large number (~1 mm) of vagabond cats. Cats aren't natural homebuyers. If we give one home to each cat we will have simultaneously solved the vagabond cat problem as well as stopped the deterioration in home prices and disintegration of capital in the banking sector.
Posted by: Stephen Daedalus at Sep 24, 2008 1:01:02 PM
I hope you're joking, Tyler.
In other news, why doesn't the Fed/Treasury want to buy *my* illiquid assets, like my Cobalt Flux dance pad?
Why do only wealthy banks get pity when they have trouble selling stuff like that?
Posted by: Person at Sep 24, 2008 1:03:56 PM
No, the only way to help main street is to give 700 billion in unmarked bills to Goldman Sachs and some other critical institutions. If the people of this country won't pay this money, they will feel the burn.
Posted by: Warren Buffet at Sep 24, 2008 1:04:25 PM
How about instead of destroying homes they just strip their assets and re-sell them on eBay. It worked for Gordon Gekko.
Posted by: Mark Bean at Sep 24, 2008 1:05:57 PM
You could borrow $700,000,000,000 and then have a payroll tax holiday (or gas tax, or sales tax, or other regressive tax). That'd help those ‘lower’ in the chain
I'm not convinced that if borrow that much we should use it to retard the housing shakeout and boost housing prices, which we already do with income tax advantages.
But I'm operating at about a 20% Knows-What-He's-Talking-About level.
Posted by: $9,000,000,000 Write Off at Sep 24, 2008 1:06:14 PM
You are naive to assume Tyler was joking about destroying the houses. I have a better idea, lets pay construction workers to not make homes! This has worked beautifully the many times we have paid farmers to not grow crops.
I also think it could be useful to have massive forced immigrations to areas with excessive housing(detroit) and put the inevitable diseenters into labor camps.(freeing up more labor capital to be used by our military industrial complex)
Posted by: Chertoff at Sep 24, 2008 1:11:01 PM
God I hope this isn't some sort of out of season April Fool's joke.
They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes.
Comrade Cowen,
What will be the market response of high home prices? It will be to build new houses, which will lower home prices. Thus if you want your scheme to work you will need to restrict new home building. Which central planning committee is to be tasked with determining the "right number" of houses to be built, and which metric(s) do you think they should use in that determination?
Anyway, this misses the whole point of what the problem is. Some people can't afford their mortgages and are defaulting on them. One reason they can't afford them is their income is too low. The other reason they can't afford them is that home prices are too high, or at least they were when they bought them.
The problem isn't that we have too many homes, that is an impossibility. The problem is that homes on offer are priced too high for people to buy, probably because home sellers are in denial, and they are hoping someone in government will give them a handout (such as you propose) and thus they are delaying and delaying reducing their offering prices enough for markets to clear.
In other words home prices need to fall, and destroying homes is the exact opposite of what we need for that to happen. Having government (i.e. taxpayers) pay for houses and give them to people who can't afford a house unless it is priced below replacement cost also solves nothing.
Posted by: happyjuggler0 at Sep 24, 2008 1:12:41 PM
http://en.wikipedia.org/wiki/A_Modest_Proposal
Posted by: DRB at Sep 24, 2008 1:13:55 PM
There is a simple solution here: German retirees. Right now, the law is that they can only live in the US for 6 months a year. If you pass a law letting retirees stay in the country all 12 months (no work visa or green card, etc.) then you'd have another few million retirees looking to buy condos in Florida. Problem solved. An acquaintance tried this with Iraqi's looking to recycle the reconstruction dollars on Florida real estate. No visas, no deal. A shame really.
Posted by: bjk at Sep 24, 2008 1:14:34 PM
Can you please explain why home prices should be artificially inflated? How does furthering the distortions in the market get us back on track? Or are you just trying to kick the can down the road?
This reminds me of the disastrous policies of the Great Depression when farmers were pouring milk into ditches and destroying crops to keep prices high.
Posted by: Christina at Sep 24, 2008 1:14:34 PM
There is a simple solution here: German retirees. Right now, the law is that they can only live in the US for 6 months a year. If you pass a law letting retirees stay in the country all 12 months (no work visa or green card, etc.) then you'd have another few million retirees looking to buy condos in Florida. Problem solved. An acquaintance tried this with Iraqi's looking to recycle the reconstruction dollars on Florida real estate. No visas, no deal. A shame really.
Posted by: bjk at Sep 24, 2008 1:15:31 PM
The idea of using high foreclosure rates to target areas to destroy homes is very bad, a similar idea was floated in the Wall Street Journal a few weeks ago.
I am in Stockton, CA; foreclosure capital of the country. High foreclosure rates are driven by the collapse of an extreme price bubble, not a surplus of housing. Prices were over 8x median family income. Many folks being turned out on the street are actually tenants renting from "investors" who paid bubble prices.
In Stockton, the rate of new construction to population growth was below the national average. Vacancy rates and number of people per household suggest housing is more scarce here than the rest of the country. Prices are finally down to the point where the affordable housing crisis in this community may finally be alleviated. People paying 50% of their income in rent/housing costs is common... and you want to destroy housing???
When the foreclosed homes are put back on the market at prices consistent with local incomes, there are bidding wars. I personally lost 6 of these before finally buying a house. Rental demand is high. When I moved out of my rental, there was a crush of showings that looked like a peak bubble - for sale open house - and he was able to easily rent it for $100 more a month than I paid this winter. Many of these folks looking for rental housing were just looking for a cheaper place to live before they "mailed the keys."
Your buy and destroy strategy might make sense for Miami condos, but does not everywhere. In Stockton, this would definitely hurt the community while helping subprime lenders.
Please don't advocate this approach without looking at the real data.
Posted by: J Michael at Sep 24, 2008 1:15:46 PM
Lend the money to local public housing authorities. If the public sector is going to get into the housing business, at least give the money to a part of the public sector that's set up to deal with it.
Posted by: Don Marti at Sep 24, 2008 1:21:03 PM
As someone just a few years out of college and looking to start a family at some point, tell me: why I should be worried that home prices are too low? Keep this up for a few more years, and I may actually have enough money to go years into debt to buy a house.
Even if I don't end up buying a house, why should the government be subsidizing homeownership over renting? Are renters like me really so awful a lot?
Posted by: d.cous. at Sep 24, 2008 1:28:33 PM
Alex and bjk are right. Part of the problem is we've reduced demand for housing of any kind, whether rental or owned, because we've gotten a lot tighter on immigration. Yesterday's Post said the census showed a half-million fewer immigrants in 2007. That's maybe 200,000 housing units cut out of the demand side.
Bottom line: Tom Tancredo is responsible for our mess. :-)
Posted by: Bill Harshaw at Sep 24, 2008 1:30:03 PM
Here's a variant on the same idea, but which doesn't destroy any homes.
Heavily tax the construction of NEW homes and use the revenues to help the construction industry employees find other employment in industries that don't have a big supply overhang. Phase out the construction tax over five years.
The effect would be similar to Tyler's plan: less supply, so prices of existing go up immediately in response. However, there would be no (or at least less) destruction of existing physical assets. Instead, fewer new homes would be built and resources would be redeployed elsewhere (healthcare? environment? Afghanistan?)
Alternatively, a credible commitment to substantially increase legal immigration for 10 years would also have a similar effect, but via the demand side.
Posted by: a student of economics at Sep 24, 2008 1:35:14 PM
Wow, Tyler... no offense, but you've really become a disappointment of late as an economist. In addition to your recent apologizing for government
"Ideally we could send money to anyone about to default."
Funny, I didn't know that was the Fed's job. Maybe we should rephrase your statement as "Ideally we could send money to anyone about to default, and create inflation or raise taxes on everyone else to pay for it."
"They can buy or confiscate empty homes in those areas and destroy them."
Does this even deserve a comment from anyone on here? Who pays for the houses? Sounds like the taxpayer to me, and once their destroyed, your previous thought that the government could actually prosper through their interventions goes out the proverbial "broken window."
"Dealing the homes away in the right manner could win back some money for the government or help out others in a very humane way."
The "right way?" As determined by whom, government bureaucrats, or our resident
"philosopher king?"
Posted by: Anonymous at Sep 24, 2008 1:36:26 PM
The government covering the debt does nothing to erase the underlying risk. If large scale defaults happen, it will drive down asset values. People will be unwilling to lend and unable to borrow still. No change in economics.
To change the risk, you need to decrease the likelihood of default. That means increased penaltites for default and decreased burdens of debt. Principle balances needs to be reduced or interest rates need to fall. Only ways to reduce risk.
Posted by: aaron at Sep 24, 2008 1:47:23 PM
Some of the recent ideas to solve this crisis make me think that we're in Zimbabwe.
Posted by: John at Sep 24, 2008 1:52:48 PM
Anonymous @ 1:36 - please allow me to invite you to partake in an act of auto-coitus. Tyler is not advocating these ideas, merely tossing them around. There is a lot of value to brainstorming "crazy" ideas - that's how a lot of good ideas are born.
Posted by: bartman at Sep 24, 2008 1:54:24 PM
Prices are not falling because of a surplus of homes -- they are falling because of a shortage, which tearing down homes would exacerbate. Housing shortages lead to housing bubbles and greater volatility in housing prices. See Glaeser, Gyourko, and Saiz's recent paper on housing bubbles.
Posted by: Antiplanner at Sep 24, 2008 2:13:05 PM
Let's see. I'm making more money this year, going out less and doing less for entertainment, but taking on debt instead accumulating savings like last year. Maybe if these banks were as affraid of investing in real estate and commodities as they are of people, their investing in people wouldn't be as risky.
I don't think what is at risk here is our economy, it's 10% returns on investments.
Posted by: aaron at Sep 24, 2008 2:14:20 PM
