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Houses of Pain
When did declining home prices become politically intolerable?
(Page 4 of 4)
And maybe I’d be a fool not to default on my mortgage now, just to see what portion of my lost property value Wells Fargo will be willing to eat. Maybe the owner of a poorly run automaker ought to apply to SEC Chairman Cox for protection from short sellers, a benefit the commission has provided to distressed financial firms. Maybe my old boss Sam Zell of the Tribune Company could apply for relief, on the argument that his properties turned out to be overvalued and he’s vastly overextended in the credit markets.
The market seizures of 2008 make all those arguments slightly less ridiculous. There will be others like them, newly credible calls for nationalized health care, Washington-led energy “investments,” re-regulated airlines. And the people who were once in the best position to refute those arguments have chickened out of the debate. The desertion of the capitalists isn’t so much dismaying or horrifying as it is pathetic and cowardly. Maybe they didn’t really believe in Adam Smith’s invisible hand, but at least they could have heeded the economic principle of Blood, Sweat and Tears: What goes up must come down.
Contributing Editor Tim Cavanaugh is a Los Angeles–based writer.
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|12.23.08 @ 12:53PM|#
Holy single entry Batman.
We are so fucked
doom
DoooM
DOOOOM
God I need a drink.
MILTON! Why has thou forsaken us?
|12.23.08 @ 12:55PM|#
What we should remember about this is that from the government's point of view this situation is not and never has been about economics. It's about power over you and me. The government individuals involved are very likely pleased that this problem has occurred. Now they can have even more power.
|12.23.08 @ 12:57PM|#
Separeated at birth?:
http://muppet.wikia.com/wiki/Image:Sam02.jpg
Reinmoose|12.23.08 @ 1:01PM|#
Very well written article, but
Do not mistake the role of businessmen as being that of a steward of an economic philosophy. Their role is to make the company as successful as possible, not to turn down assistance that would prevent the company from going under.
Paul|12.23.08 @ 1:28PM|#
I was playing poker the other night, and kept losing. I now refer to it as a card-failure.
Franklin Harris|12.23.08 @ 1:36PM|#
Well, it's shock therapy, isn't it? That means we'll all be living in a limited government utopia soon, right? I mean, this all wouldn't make government bigger, would it?
|12.23.08 @ 1:40PM|#
Dictionary: market failure (mär'kit fāl'yər): The market taking a turn I don't approve of.
|12.23.08 @ 1:52PM|#
All investments are speculative to some extent. That obviously includes real estate and lending money to people buying real estate.
What Paulson is saying is that his concern is for investors not prospective homeowners. It's not for current homeowners absent the small subset of sellers who will not repurchase a home, e.g. empty nesters.
He wants to ensure that speculators in real estate don't lose too much. What a fucking myopic twat.
I apologize for insulting the nearsighted and vaginas.
Neu Mejican|12.23.08 @ 2:15PM|#
CharlesWT:
Dictionary: market failure (mär'kit fāl'yər): With competition and no externalities, markets will allocate resources so as to maximize the surplus available. However, if these conditions are not met, markets may fail to achieve the optimal outcome. This is also known as "market failure".
Or
Market outcomes are supposed to be efficient, both allocatively and productively. When they (market outcomes) are not efficient, we consider them failures. So if a free market gives us too many of some type of good, or too few of another type of good, we are either over-allocating or under-allocating our resources. In the case of market failures we are productively inefficient and/or allocatively inefficient. The market system has failed to deliver on what its advocates claim it does best.
Paul|12.23.08 @ 2:16PM|#
Adam Smith, you say? Adam Smith voted for the bailout!
Oh wait, that's Adam "no, not that one" Smith. My bad.
Invisible Finger|12.23.08 @ 2:19PM|#
God, I fucking HATE this:
The federal government has played a major role in creating a debt-fueled real estate market through tax policy, which allows deduction of house-related interest payments (a piece of social engineering few of us would abandon).
ABSOLUTELY GODDAMN FUCKING WRONG!!!
Prior to the Tax Reform Act of 1986 (TRA86), the interest on ALL personal loans (including credit card debt) was deductible. Since 1913!!
Why do we continually spew this bullshit about home owner subsidies when in reality it was Ronald Reagan TAX INCREASE!?
The federal government has played NO ROLE WHATSOEVER in creating a debt-fueled real estate market through tax policy. They HAVE done it with things like FHA, GI Bill, etc. But NOT tax policy.
For EVERY business, ALL interest payments are a legit cost of business that are a subtraction from revenue when calculating income. Why the fuck do libertarians feel the same should not hold true for households? Businesses even get to depreciate real estate assets, households don't.
|12.23.08 @ 2:22PM|#
"Male hysterics"...priceless!
|12.23.08 @ 2:28PM|#
Neu Mejican,
A fair correction, though it may be that CharlesWT was being facetious. After all, the point of the article is that Il Duce for today's economy doesn't know the definition of market failure.
Invisible Finger|12.23.08 @ 2:34PM|#
And the people who were once in the best position to refute those arguments have chickened out of the debate.
More like bribed. Although I think Wells Fargo is lying on their balance sheet, when your in a room with 8 of your competitors getting free money, you're a sucker if you don't take it.
Better to be a live chicken than a dead duck.
|12.23.08 @ 2:44PM|#
The market system has failed to deliver on what its advocates claim it does best.
By the way, the actual instances of market failure are very few and growing fewer as advances in technology provide ways to internalize their costs and benefits.
But if we characterize political failure similarly -- as the system failing to deliver on what its advocates claim it does best -- you would be hard pressed to argue that more than half of government, by whatever measure you choose, is not beset by political failure.
Trying to fix honest to goodness market failure using political means is at least a rational prospect. Trying to fix pretended market failure using political means is a recipe for the destruction of choice and wealth. Market failure is the exception. Political failure is the norm.
|12.23.08 @ 2:46PM|#
Free markets are generally efficient, but shouldn't be expected to be so in every instance. Optimal outcomes are what governments, not free markets strive for.
This is a feature, not a failure. Failures periodically remind market participants that there are risks and downsides to their activities. This increases the overall efficiency of the market.
|12.23.08 @ 3:25PM|#
T-T-T-Timmy!
Good article.
Invisible Finger,
Rather than show TC to be wrong, you have proved his point. The Tax Reform Act of 1986 made mortgage debt preferable to all other debt--not by making mortgage debt cheaper, but by making all other debt more expensive.
Paul|12.23.08 @ 3:42PM|#
I was snowboarding the other day, and I suffered a couple of epic gravity failures. Needless to say, the outcomes were not as efficient as I would have preferred.
Neu Mejican|12.23.08 @ 4:27PM|#
MikeP,
though it may be that CharlesWT was being facetious
He posts the same sentence whenever market failures are mentioned.
After all, the point of the article is that Il Duce for today's economy doesn't know the definition of market failure.
Certainly true.
CharlesWT,
Optimal outcomes are what governments, not free markets strive for.
No.
Optimal outcomes are what individuals strive for...markets and government are two tools they use.
herodotus|12.23.08 @ 4:56PM|#
Optimal outcomes are what individuals strive for...markets and government are two tools they use.
Markets are not tools. They are abstractions that we employ to understand how humans interact.
A government can have a collective intention, a market can not.
Willy C|12.23.08 @ 5:02PM|#
Neu Mejican,
"Dictionary: market failure (mär'kit fāl'yər): With competition and no externalities, markets will allocate resources so as to maximize the surplus available"
I would classify the FED manipulating the currency and interest rates to encourage people to consume more of a resource than they can afford (housing) as a fairly obvious externality. This clearly moves the current situation outside the realm of your definition of market failure.
Invisible Finger|12.23.08 @ 5:43PM|#
The Tax Reform Act of 1986 made mortgage debt preferable to all other debt--not by making mortgage debt cheaper, but by making all other debt more expensive.
Actually, Tim's statement is more accurate than yours. The tax increase by way of eliminating other-interest deduction eventually morphed into people taking out HELOC's in lieu of using traditional chattel credit. That IS debt fueled via real estate.
But the price explosion is a function of supply and demand way more than a function of tax policy. It's not like people make a choice to buy a primary residence instead of a car because of some tax advantage on mortgage interest instead of car loan interest. A luxury car is 40K and an average house is 350K. Some MAY have bought second houses based on the tax deduction, but the bulk of the rationale behind buying the second house was expecting the market to rise and then selling quickly enough to turn a profit over the interest paid. The 18K in interest isn't fully refunded by the deduction. If there is anyone being subidized by the MID, it's house builders. But even then it's only supporting those buying a second house with the intention of renting it out. If that were a commercial loan for an apartment building, the loan interest would be deductible from income and no one would even question the validity of it.
There isn't even a tax advantage in mortgage interest versus renting. If average rent is 1K a month and a comparably-sized house is 300K at 30-years & 6% interest, that's 18K a year in interest versus 12K in rent. The 18K deduction isn't lowering your income tax by 6K, only about 3K.
Bottom line is the mortgage costs at least 2-3K MORE than renting until you've owned the house more than 12 years. That's a 2-3K LOSS, not a 2-3K GAIN. Therefore, no advantage. The only rationale is the MID results in a 3K loss instead of a 6K loss, but it's negligible in terms of increased demand. The increased demand was fueled by abundant credit, not tax policy.
There was a change in capital gains tax enacted at the tail end of the Clinton regime that had a lot more of a tax advantage to home ownership (in a rising market) than the mortgage interest deduction. But this was not mentioned in Tim's piece.
|10.25.10 @ 6:07PM|#
But the objection goes even deeper than this. Invisible Finger seems to be operating under the assumption that any deduction that businesses "get," individuals should get too....
"For EVERY business, ALL interest payments are a legit cost of business that are a subtraction from revenue when calculating income. Why the fuck do libertarians feel the same should not hold true for households?"
I don't see why this should be so. Businesses get to deduct their phone, utility, lawn care, etc. costs too. But does that mean that individuals should be able to as well? Business interest, like the above mentioned costs that a business incurs, is money spent in the pursuit of making money. It is an expense in production. Business interest, like the company's phone bill, is therefore properly deductable when considering what the business should pay in income taxes, which are levied on profits (ie payments recieved minus the cost of providing the goods or services for which the payments were made). An even more salient and obvious comparison is to commercial renting. One business pays rent, another takes out a mortgage and buys land. Both are using the premises to conduct business. Thus, both the costs of renting and the costs of buying are properly seen as legitimate deductions.
Homeowner interest, like a home phone bill, is an expense of consumption, not production. Again, look at rent as the most obvious analogy. Apartment renters can't deduct their rent from their income tax. And why should they be able to? Personal income tax is (or should be, if it were consistent) only concerned with how much money one makes, not how one chooses to spend it. Just as there is no deduction for leasing a car, there is none for buying one either. Including interest payments. (I'm not getting into the argument here about whether employee expenses should be deductable or not. But owning a house is pretty much never necessary for any job. One has to live somewhere, just as one has to eat. But neither eating nor housing payments are necessary for doing a job qua doing a job. You need a place to live and food whether you work and make income or not.)
My disagreement is with the author, who says that we can't even consider ending this obvious subsidy for home ownership. (And it is a subsidy. That is still might be cheaper to rent is besides the point. It would be even more cheaper to rent without the subsidy.) Houses are units of consumption, not production. Owning a home and/or a piece of land does not make one economically or politically independent, as it arguably did when the idealogy of widespread land ownership first arose in the late 18th and 19th centuries, when homes doubled as units of production (farms, shops, taverns, inns, etc). I see no reason whatsoever why the government should prefer that I own my home, rather than rent it. Just as I can see no reason for it preferring that I own a car, rather than lease one.
As for social stablity, take a look at Switzerland. Like the US, it is heterogenous, federal democratic republic. Like the US, it has an idealogy of the yeoman farmer facing down monarchists. It is a wealthy country, with a high savings rate. Yet home the home ownership rate in Switzerland is only half of what it is in the USA. The government does not subsidize home ownership, either directly or through tax policy, and full, 20 per cent deposits are required by the banks. The Swiss are quite content to rent, and to put their extra money in the bank, in stocks, bonds, etc (not "down the toilet," as a commenter below suggests renters do). One needn't be a homeowner to be weathly, or a good citizen.
As for that business about passing on investments and savings from one generation to another, there is still no reason to prefer a house to any other kind of investment. I would much rather inherit cash, stocks, bonds, or gold than a house. Why would I prefer an illiquid asset over a liquid one? And many parents do in fact sell their homes, scale down their living quarters, and instead of a white elephant, pass down their money to their kids in cash and securities.
Finally, and here I agree with the author, for decades we have heard that a big problem is the lack of affordable housing. Well, over the last few years, housing has become more affordable. Why is that now a bad thing? And it would be more affordable still without all the old and new government subsidization of home ownership. The government should get out of the real estate business, and let prices (rental and purchase) find their own levels.
|12.23.08 @ 6:43PM|#
It is amazing to me that we have not heard more about the Federal Anti-Regression Tax, which should be eking out of Washington mid-January.
Neu Mejican|12.23.08 @ 6:53PM|#
herodotus
Markets are not tools. They are abstractions that we employ to understand how humans interact.
Really, so when I walk into the Farmer's Market up the street I am walking into an abstraction used to explain how humans interact?
When I put something "on the market" I am using an existing social structure to achieve an end...social structures are very real things...despite being non-material.
IOW, Markets are tools used by humans to exchange things.
A government can have a collective intention, a market can not.
A government is a process, so, properly, it is the community which has a collective intention. Government is a mechanism, or tool, used to achieve that intention.
Neu Mejican|12.23.08 @ 6:55PM|#
Willy C,
This clearly moves the current situation outside the realm of your definition of market failure.
That's not MY definition of market failure.
That is the standard definition of market failure.
As far as it applying here...opinions will vary, I am sure.
Chubulor Corpulens II|12.23.08 @ 11:42PM|#
Really, so when I walk into the Farmer's Market up the street I am walking into an abstraction used to explain how humans interact?
No, you're conflating two different meanings of the word "market". The Farmer's Market and the housing market are two very different entities; one is a physical place where people meet to buy and sell, while the other is the totality of all people buying and selling houses. The transactions in the housing market do not share a common location, and each transaction involves different parties, quite unlike the Farmer's Market.
Chubulor Corpulens II|12.23.08 @ 11:44PM|#
A government is a process, so, properly, it is the community which has a collective intention.
Huh? A government is not a process, unless you're conveniently confusing word meanings again. The word can be used to describe the process of governing, but unless you're quite foolish you don't think that's the sense we're using it in.
Neu Mejican|12.24.08 @ 2:36AM|#
Chubulor Corpulens II,
I disagree with your analysis.
I am sorry you have such a hard time with the basic meanings of words.
The housing market is more distributed in space, but it no less real than the farmers market BECAUSE (in part) each transaction involves different parties, exactly like the Farmer's Market (or are you conflating the building with the market? tsk tsk).
As for the meaning of government...I am not confused, I am specifically disputing the sense in which government was used in the specific sentence it was used in. I was arguing against the way it was being used because there was an improper conflation of the process and the agents that carry out that process in the specific sentence I commented on.
Craig|12.24.08 @ 11:34PM|#
A great article by Mr. Cavanaugh. At least some Reason writers still believe in the free market.
I wonder how much the American people really oppose the bailouts, though. There was a great outpouring of opposition to the $750 billion theft/TARP program, but almost all of the Congressmen who voted for it got reelected, even those (like mine) who admitted that calls and emails were running anywhere from 8-1 to 50-1 against it.
Justen|12.25.08 @ 6:05PM|#
There's a very simple reward for homeownership: it's better than the alternative, which is to flush your money down the toilet in order to help someone else cover their own investment (rent).
It's like the difference between putting your extra money in a savings account or using it as kindling to light your fireplace. That's the guarantee of homeownership: simply that you get something permanent. There's no guarantee it'll increase in value, but it certainly won't lose value as rapidly as your rental agreement does (at the end of every month, its value goes to 0!). This whole thing is ridiculous and disgusting.
@Craig: who were we going to elect: the guys who supported the bailout, or the guys who would have supported the bailout? that we have some sort of reasonable range of choices in our representatives is laughable.
|12.31.08 @ 9:08PM|#
Tim, when you stated that "Paulson didn't depart from current Republican ideology. He created it.", I assume you intended the scope of "current" to be limited to the ideals of McCain and Bush, and not Gingrich. I'd love for you to be able to spend some quality time with SEC chair Christopher Cox.
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Ed Driscoll » “Christina Romer: Our War On The U.S. Economy Must Continue” links to this page. Here’s an excerpt:
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David Mayer|7.6.10 @ 11:06AM|#
Very good work! I always like to leave comments whenever I see something unusual or impressive. I think we must appreciate those who do something especial. Keep it up, thanks
David Mayer
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