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.
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.
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”?
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?
How about instead of destroying homes they just strip their assets and re-sell them on eBay. It worked for Gordon Gekko.
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)
http://en.wikipedia.org/wiki/A_Modest_Proposal
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.
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.
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?
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.
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.
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.
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.
Instead of bulldozing homes, Congress could exempt residential rental income from federal taxes, or at least dramatically reduce the applicable tax rates, for a few years on homes purchased after a certain date. This would stimulate the sale and re-occupancy of vacant or foreclosed homes and help stabilize the market.
How about writing off a certain percentage of the priciple on all outstanding debts.
Everyone accross the board gets 10% whacked off of their priciple balance. It can come out of people’s social security taxes and checks.
Termites are the answer!!
DRB 1:13
People, lighten up! Its a *joke*. Ha! ha! mostly kidding!
See Swift’s _A Modest Propsal_
Tyler’s comments are either a joke, or maybe Tyrone is in the house. Or maybe he is giving the best answer he can to the question he was asked: Is there any way to force the benefit of the bailout to bottom rung of the problem.
The short answer to this question is no, but Tyler gave it a shot.
It is comforting to see that other people have already spotted the absurdity of trying to save the economy by destroying wealth.
I think we could save the economy if we bulldozed D.C. Maybe just the threat would do it.
We should require that all people accepting the loans have a chip implantd in their heads. It would help us keep track of the criminals.
And if milk prices rise too high, we should probably poor excess milk down the drains.
The bailout will fail for the same reason the bailouts failed in Japan.
Artificially high asset prices cannot be sustained, the government will never right enough checks to sustain assets that are un-affordable and prop up malinvestment that is not in the interest of the consumer. consumers and the market have given up on real estate the government should let it be.
Its amazing though how the liberal democracy withers on the vine.
We are in debt to the tune of 500,000 for every man women and child when you consider the guarantee on Social Security and medicare and yet people now want to guarantee their investment on housing, and healthcare.
Its apparent that this will end badly and far worse than the Great Depression, its going to take a catastrophic systemic collapse to wake people up the failures of central banks and central planning. One would think the experiments of the Soviet Bloc, Cuba and our own mistakes over the last 70 years would be enough evidence.
But I guess we need to really take this Social Democracy trip to its inevitable and horrible end.
Buy and destroy houses? Pay construction workers not to build new homes? What’s with the supply-side-only approach?
We need to stoke demand: Increase the per-child tax deduction, heavily tax contraceptives, subsidize fatty food to make Americans larger, and use zoning rules to set minimum sizing standards for furniture.
This is similar to my idea of having the government print and send us enough money to cover our income taxes.
Excellent idea with proven track record. It worked out well for wheat farmers in 1929.
We should just wipe out credit card debt to the tune of $700billion. The stimulated spending would take care of the crisis. I mean if we are going to violate contract laws, the benefits should be democratic.
It’s not like you have to destroy the homes. All you have to do is to lock them out of the market for a longer period, or force-convert to non-residential purposes.
A major issue driving the fall of prices is their impetus. Some people do not buy at the current price level, because they expect the prices to fall even more, an anti-bubble.
Should one manage to somehow stabilize the prices, this withheld demand would come back.
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