In my post on 18 September, “A vital but widely misunderstood aspect of our financial crisis“, I made a radical proposal:
Here is one way the government can fix the housing crisis: buy and destroy homes. The government did this with food during the Depression, to help farmers by increasing food prices. That was tough on food consumers, just as destroying houses would increase living costs.
The reaction in the comments ranged from incredulous to strong opposition. “Misguided” was the mildest comment.
A month later this proposal no longer looks so radical. Last week economist David Rosenberg said:
If the name of the game is to finally put an end to the deflationary spiral in residential real estate, there will have to be supply-side solutions. Some folks have talked about eh government ring-fencing the one million excess homes and condos that are vacant and for sale across the country that remain the culprit behind this lingering house price contraction, adn then bulldoze these units.
Nor was I the first to suggest this. Holman W. Jenkins did so in “The Radical Solution“, posted 2 April 2008 in the Wall Street Journal. Excerpt:
We’re not there yet, but we’re getting there. Ben Bernanke so far has been financing the Fed’s bailouts of investment banks and their hedge fund clients with real assets, not inflationary play money. But political pressure continues to build for more toxic medicine.
No wonder economists of diverse ideological stripe are lining up behind a taxpayer bailout of homeowners and lenders, fearing the alternative is a global inflation crisis. But another option has hardly been considered in Washington, though it’s old hat in the sticks: Using tax dollars to buy and demolish foreclosed, unoccupied or half-built houses in selected markets.
This isn’t as wild-eyed as it sounds. Ben Bernanke pointed out in a footnote to a recent speech that such programs already are at work in the Midwest. “In highly depressed housing markets, the worst-quality units are often demolished to mitigate safety hazards and reduce supply.”
Baltimore has been praised for efforts to keep borrowers in their homes, but little mentioned is a program of demolition of foreclosed homes. Cleveland spends $6 million a year to demolish buildings. Dayton plans to demolish 550 this year. Only a small mental adjustment is required to begin aiming these bulldozers at “new” homes too. Get over it.
Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars. It can proceed experimentally. It can be turned off quickly when the need evaporates. It would not be a lesson to Americans that housing debt is not real debt and need not be repaid. It wouldn’t benefit the most irresponsible lenders and borrowers at the expense of responsible ones. The housing market would still have to hit bottom, but the bottom would be higher (and sooner).
Have no illusions about the alternative being fashioned in Congress. Behind the fig leaves that will be frantically waving, a lending bailout would be effective in stemming foreclosures and propping up home prices only if taxpayer money were used to put speculators’ housing bets back “in the money.”
… Let’s get real. So much of the subprime-financed overbuilding was concentrated in four states – California, Florida, Nevada and Arizona – that the Mortgage Bankers Association, which collects the numbers, says they “skew the national data.” Parts of Florida now have an 80-month surplus of condo inventory.
… This supply overhang in a few key states, in turn, poisons the market for undifferentiated securitized mortgage debt, which has been the source of persistent instability in global credit markets.
Most of all, a demolition strategy would not add to the policy screwups that are a major but little mentioned contributor to the current troubles – the massive, relentless subsidies that Washington dishes out to rich and poor alike as a reward for incurring housing debt.
… We will survive today’s crisis even without heroic action from Washington to refloat the housing market. Worse than no solution, though, would be one that greatly increases the subsidy to risk-taking already in the system.
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- A solution to our financial crisis
Key posts about the financial crisis
- A solution to our financial crisis, 25 September 2008
- A picture of the post-WWII debt supercycle, 26 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
- Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008