Should we be surprised that trying to end the nation’s housing crisis by doing more of what caused it has failed?
The news on the housing front is not good for our government’s manipulators of interest rates, money supply, and the housing market.
The Standard & Poor’s/Case-Shiller home price index, which tracks prices in 20 major cities, recently came out for November. It fell 1.6 percent in November from the same month a year ago.
Housing prices fell in 16 of the 20 cities surveyed, according to the Case-Shiller report, the fifth consecutive monthly decline.
If we don’t want to trust a private firm’s report, there is the Federal Housing Finance Agency’s housing-price index, also released a few days ago. This index covers mortgages sold to or guaranteed by Fannie Mae or Freddie Mac, government-sponsored entities that would have collapsed without a taxpayer rescue. It showed home prices declined 4.3 percent in November from the same month a year earlier.
There’s certainly nothing wrong with falling housing prices if you happen to be in the market to buy a house, and there’s nothing wrong with falling housing prices when there is a glut of housing and a flood of foreclosures. That is what is supposed to happen when supply outstrips demand.
But it’s not supposed to happen when the government pours trillions of dollars into rescuing mortgage lenders, buying government debt, forcing interest rates to record lows, enacting economic “stimulus” programs, and taking other steps aimed at propping up property prices and boosting employment so that more people have money to buy houses. That’s what they’ve been telling us, anyway.
It apparently has escaped the notice of government policymakers that years of monetary and interest rate manipulations created a housing boom, which created runaway mortgage lending, which created runaway housing prices, which created a housing bust, which created a financial collapse.
Federal Reserve Chairman Ben Bernanke and his predecessor, Alan Greenspan, have both said people cannot spot bubbles. They’ve both admitted they did not foresee the housing collapse.
Yet Bernanke and other government policymakers want us to trust them to manipulate the economy to fix the problems they failed to detect and forestall, problems their earlier policies of monetary and interest rate manipulations helped cause.
Their prop-up-the-housing-market policies continue and no doubt have had some impact. Trillions of new dollars cannot help but do something. But that impact has been to prolong the problems while sending government debts and deficits soaring.
If Bernanke, President Barack Obama, and other policymakers want to do something constructive, they should do the opposite of what they’ve been doing. End the mortgage rescues. Let interest rates go where they should. Let housing prices change to match what people think houses are worth to them. Then people will know where things stand, and the recovery will begin.
There is precedent for this. In 1920 there was a severe recession, a collapse bigger than the one that sparked the “Great Depression” of the 1930s. Unemployment topped 12 percent, and gross domestic product dropped an astonishing 17 percent. Yet almost no one has heard of the 1920 financial crisis because it was so short-lived and the recovery was so sharp.
The president then was Warren G. Harding, a Republican derided by historians. Instead of “fiscal stimulus,” Harding persuaded lawmakers to cut the federal budget nearly in half between 1920 and 1922. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve sat on its hands.
By the middle of 1921 the recovery had begun, and we had the Roaring Twenties. We could do just as well today by changing course and allowing the economy to function.
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.
