Houses of Pain

When did declining home prices become politically intolerable?

Your house isn’t worth as much as you’d like it to be.

That’s probably no surprise right now. Maybe it’s unkind to rub it in. But a harsh appraisal has been one simple bit of reality to hold onto amid the frenzied, hysterical, high-pitched panic that seized leaders of government, business, and finance throughout 2008. In less than a year, vast swaths of American finance have been effectively nationalized, and the “Washington consensus” of more-or-less free market economics has come under the kinds of attacks not seen in a generation.

Why did this happen? Because your house was overvalued. It probably still is. But the watchmen of capitalism have chosen this time to act on a strange new form of economics. According to the new thinking, the value of an asset—even or especially an asset universally viewed as overpriced—must not be allowed to decline. This kind of economic intelligent design, endorsed by Republican and Democrat alike, even holds that a price decline cannot be a rational outcome in a competitive environment. Rather, it must be evidence of “market failure.”

Asking prices for homes since the June 2006 real estate peak have declined about 15 percent, according to the Office of Federal Housing Enterprise Oversight. Other indexes put the decline closer to 20 percent. The panic of the nation’s elite, however, has been a gauche and amateurish 100 percent. At the beginning of 2008, the financial market was doing largely what it was supposed to do: reflecting changes in economic conditions, weeding out bad borrowers and lenders alike, rewarding the patient, punishing the rash, learning from error. But the cascading bailouts of investment banks, insurance companies, government-sponsored enterprises (GSEs), and commercial banks have replaced that relatively hands-free process with a new system in which decision making is centralized, reality is made to conform to political perception, irresponsible behavior is rewarded, and Washington technocrats decide who gets free money and how much houses should cost.

The federal economic seizure of 2008 is the most serious challenge to free enterprise since the Soviet era. It is far more grave than the Dow Jones Industrial Average’s 40 percent decline from its October 2007 peak of 14,164 points, or the extinction of Wall Street’s five largest investment banks. The bailout throws good money after bad in the credit markets, paves the way for every too-big-to-fail institution in the country to dump its bad luck and bad decisions on taxpayers, and turns “moral hazard” from an academic term into the prevailing economic paradigm. No surprise, then, that big-government liberals such as Slate Editor Jacob Weisberg are using the crisis to celebrate “the end of libertarianism.”

It would be tempting to channel the Milton Friedman–bashing Canadian penseuse Naomi Klein and pretend the advent of Disaster Socialism was enacted according to some shadowy plan. But the evidence points to a simpler, and ultimately more troubling, theory. Lame duck Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben S. Bernanke, and President George W. Bush are not conspirators. They’re just male hysterics. When put to the test, their support for free markets fell short.

Don’t Bail These People Out

Their confidence in the American people fell even shorter. Along with a Democratic Congress and a hyperventilating press, Bush and his financial team didn’t think Americans could stand to wait a few years before unloading that white elephant of a house. The idea that a nation formerly celebrated for its fortitude might be able to scrimp and save through an economic downturn (one that in most regions of Earth would look like a boom by comparison) was alien to them.

But in assuming that we were panicking, Bush’s team appears to have been wrong: The 2008 economic interventions were in fact extraordinarily unpopular, foisted by politicians, business leaders, and the mainstream media onto a public that vociferously opposed them at every step. Mistaking the pressure of a national election and a historically unpopular presidency for a mandate, Paulson, Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and others have begun a sweeping takeover of the private instruments of finance.

Major steps included the $400 billion Federal Housing Finance Regulatory Reform Act (passed by Congress and signed by President Bush in June, after 20 days of debate), the $700 billion Emergency Economic Stabilization Act (signed in October, after less than two weeks of debate), the Federal Reserve’s swallowing of the $6 trillion GSEs Fannie Mae and Freddie Mac in September, a host of new federal guarantees against losses, and countless government-brokered “rescues” of ailing financial firms. The scope of the change is beyond ready comprehension.

In this, Paulson & Co. have been applauded by the mainstream media, both major political parties, both presidential candidates, and many stock market pundits. Throughout bailout season, however, the unpopularity of these efforts continued to be both remarkable and little remarked on.

In an October Fox News/Opinion Dynamics poll, 53 percent of respondents said government involvement was “not part of the solution at all.” Around the same time, a Los Angeles Times/ Bloomberg survey found 55 percent opposition to a government-funded bailout. A full 77 percent of respondents told CNN/Opinion Research that the bailout would primarily reward those responsible for the downturn.

Those majorities were notably catholic in their distribution across social types and party affiliations. Asked if the September-October crisis was “a good time for higher taxes and a larger government or…a good time for lower taxes and a smaller government,” two-thirds of Democrats chose lower/smaller in the Fox News poll. Nearly equal numbers of Democrats and Republicans thought the bailout would have either little or negative effect. Call-in radio, blogs, and any other media outlets allowing serious levels of user feedback demonstrated the degree to which white and black, left and right, owner and renter, rich and poor all hated the bailout.

That moment of public bipartisanship—an almost exact mirror of the political bipartisanship with which the bailout was rushed into law—neatly repeated another futile popular groundswell against federal intervention from earlier in the year. The Federal Housing Finance Regulatory Reform Act of 2008 should have been an easy sell, since it purportedly aimed to assist homeowners, a more popular (or at least more sentimentalized) subset of Americans than greedy Wall Street tycoons. But even there voters balked. Polls early in the year that specifically tried to gauge support for bailing out homeowners found the public opposed by nearly a 2-to-1 margin. Rep. Kevin McCarthy R-Calif.), whose district has one of the highest foreclosure rates in the country, nonetheless noted at the time that his constituent mail was running “50 to 1: ‘Don’t bail these people out.’ ”

On the few occasions when elites did take note of public opposition to all these market interventions, it was generally in the service of deriding or psychopathologizing popular opinion. During a December 2007 meeting with Paulson, my (private-sector) colleagues and I at the Los Angeles Times apparently surprised the treasury secretary by expressing doubt about his mortgage rescue package. His response: “I see I’ve got a skeptical group here. It’s amazing: I’ve spent my life in the private sector, and it’s amazing how many people I’ve met who’ve never spent a day in the private sector who think any kind of government involvement is somehow hurting [the] market.”

At about the same time, The New York Times was fretting over the “surprising amount of opposition” to the plan. Later, when the House of Representatives all-too-briefly blocked the bank bailout, Washington Post columnist Dana Milbank called opponents “wingnuts,” with New York Times columnist David Brooks preferring the term “nihilists.” A Times science article from October 2008 purported to explain that the “public urge for punishment that helped delay the passage of Washington’s economic rescue plan” was the result of some kind of faulty evolutionary hardwiring. “The thinking,” says Matt Kibbe, president of the free market advocacy group FreedomWorks, “seems to be that these decisions are going to be made regardless of public opinion, because the people don’t know what’s best for them.”

‘The Most Irresponsible Scaremongering in the History of the United States’

Paulson, a Harvard MBA and former Goldman Sachs CEO whose government experience dates back to the Nixon administration and whose net worth is estimated by Forbes at more than $600 million, exudes the kind of cool, intelligent competence that makes CNBC reporters swoon (rather than, say, question whether his background in investment banking makes him too sympathetic to investment banks). His shift to unconditional intervention last summer was widely viewed as a hard-won conversion. Former General Electric CEO Jack Welch, for example, praised the way Paulson “didn’t let ideology get in the way.”

But in fact Paulson had been panicking for some time. At our December 2007 meeting, he talked up his department’s new “voluntary loan-modification program” for staving off home foreclosures. “I think what we’re doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors’ interest, and in a way that the market wasn’t intended to work,” he said.

“How can you force values down?” I asked. “Why aren’t values finding their natural level?”

“The way values would go down is, as I’ve said, you’d have market failure.”

Later in the conversation Paulson predicted that after Treasury Department intervention “we won’t have housing prices driven down in ways that distort the market.”

“Is it distortion in the market,” I pressed, “when the market was already distorted up to a degree that maybe wasn’t unprecedented, but was certainly unusual in American history?”

“So you’d like to see it distorted down too?” Paulson scoffed. “Well, that’s—reasonable people can disagree. I think that would be a market failure, and I think that’s why the market players came together.”

Paulson didn’t depart from current Republican ideology. He created it. Ten months after these statements, Republican presidential nominee John McCain offered to buy up every bad mortgage in the country, and in fact every mortgage priced higher than a house’s assessed worth, in an effort to “stabilize home values in America.” Democrats, predictably, were even more eager to have government run the housing market.

Nor did the treasury secretary let results deter him. Almost without exception, the individual pieces of the great seizure failed to deliver on the promises accompanying them. On this, the crucial question of our time, the ignoramuses have proven more prescient so far than the best and the brightest.

Take the case of Fannie Mae and Freddie Mac. In April 2008, the GSEs’ rules were temporarily changed to increase their “conforming loan” limit from $417,000 to $729,750—an incomprehensible decision at a time when real estate closing prices were declining and Fannie/Freddie already had their coffers overflowing with dubious debt. The government’s July extension of the mortgage giants’ line of credit (headlined by the Associated Press as “Reality Trumps Ideology in Fannie-Freddie Rescue”) failed to stem the tide of defaults. By September Paulson had established a Federal Housing Finance Agency conservatorship to take over Fannie and Freddie altogether, with the goal of having the organizations “proactively work to increase the availability of mortgage finance.”

Yet the pace of destruction only increased throughout autumn, with a clear pattern emerging: The more Paulson tried to free up credit, the more solidly the credit markets froze. The more he tried to reassure the exchanges, the more value the stock market lost.

So was the rapidly accelerating pace of government intervention—and presidential threats of a Next Great Depression if further bailouts weren’t green-lighted—mitigating the disaster or fueling it? “If markets are driven by animal spirits,” says Kibbe, “then what they did that week”—from September 29, when the House rejected the bailout bill, to October 3, when the bill became law—“was probably the most irresponsible scaremongering in the history of the United States.”

An Asset Like No Other

It’s not hard to find plausible-sounding arguments for protecting inflated home prices. “A wide range of economists of all political persuasions have noted that the economy as a whole will not recover until housing prices bottom out,” says Robert E. Litan, a Brookings Institute fellow and economist in the Carter and Clinton administrations. “And targeted interventions can help achieve that bottom sooner and at a higher price than would otherwise be true.”

The underlying assumption—that it’s desirable to maintain a real estate price higher than a declining market would deliver on its own—is not easily dismissed. The benefits of homeownership may be harder to quantify than enthusiasts suggest, but the dream of belonging to the landed classes has helped build a great nation and culture. Ownership, improvement, and bequeathing of a family home are central to the first and most important social unit most of us ever know. Implicit in this tradition is that in exchange for faith in your home, you will receive your reward on earth, in the form of a constantly appreciating asset.

In one respect, the tradition has held true. Homes are a lot more expensive than they used to be. Comparing data from the U.S. Census Bureau and the National Association of Realtors, you can estimate (very roughly) the ratio of median household income to the median home price in the United States. A house today costs four times your annual salary. Ten years ago, it cost only three times as much. In 1988 it cost about twice as much; in 1978, less than twice as much. Happy the materfamilias who resides in a home she purchased back in the 1960s; less fortunate her granddaughter seeking to buy today (or suckers like me, who bought near the market’s all-time peak in July 2006).

There are many variables at work in this price explosion, among them that houses built today are bigger and better constructed, and that actual purchase costs were higher in the 1970s, due to double-digit interest rates. 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).

What matters going forward is that the nation’s leaders have acted, and spoken, in a manner suggesting that the ratio described above must never be allowed to shrink. “Chaos” is Paulson’s word for what happens when you allow a natural deflation of the real estate market.

“The housing correction poses the biggest risk to our economy,” he argued when announcing the takeover of Fannie and Freddie. “It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us.”

But if the goal is to get the housing correction behind us, and if everybody agrees that the correction was made inevitable by bad debt and carefree lending practices, then working “to increase the availability of mortgage finance” actually moves the goalposts further away. If the market needs to hit bottom, the most merciful move is to let it, as quickly and as efficiently as possible. Injecting more debt into the deflating housing balloon is like trying to drink yourself sober.

The hard truth—visible not only in mortgage defaults but in rapidly rising delinquencies in credit card, car loan, student loan, and virtually every other form of consumer debt—is that there are more deadbeats in America than previously recognized. The rational response to that situation is to remove those people from the credit system, to make money harder to obtain, irrespective of whether that’s good for “the economy.”

In the Alan Greenspan model of stewardship, the Federal Reserve moderates such extreme reactions. But the central bank no longer appears capable of pulling that off. In January 2001, a little less than a year into a 33-month decline in the Dow Jones Industrial Average, the Fed tried to juice up the economy by slashing its key “federal funds” rate (to which consumer interest rates are supposedly benchmarked) to 6 percent. The Fed continued to whittle down that number long after the Dow troughed in 2002, eventually bringing the rate down to 1 percent in 2003. As of this writing, with little evidence that the economy—let alone the real estate market—will pick up in the near future, the federal funds rate is 1.5 percent. Yet the interest rate you have to pay for a mortgage is slightly higher now than when the benchmark rate was four times higher back in January 2001. The Fed’s fabled influence on consumer interest rates seems to be in eclipse.

In one sense, developments like this one and the Treasury’s failure to stop the market decline are encouraging, because they demonstrate the limits of government power. But then, command economies never have succeeded in delivering results. In fact, failure to do so is the defining characteristic of a centrally planned economy.

Economic Intelligent Design

Should we be relieved that the vast 2008 interventions were at least narrowly targeted? After all, they were designed with a fairly specific goal—to shore up the crazy scaffolding of derivatives and secondhand loans underlying the bloated real estate market. Many features of the bailouts, such as the expansions of FDIC insurance from $100,000 to $250,000 per account and the raising of Fannie and Freddie’s conforming loan limit, are temporary fixes written to expire at the end of 2009. And as of the second half of October, at least one of the many promised results was delivered: Interbank lending started picking up.

But if an umpire decided mid-game that foul balls would now be counted as base hits, would that game have any more integrity if the intervention were limited to a single inning?

This is the real horror of economic intelligent design. It throws out the rules most of us have agreed to play by and tries to eliminate the downside risks that are essential to the functioning of a market. In September, after several money market funds dipped below the $1 net asset value these funds are expected to maintain, the Treasury provided $50 billion in temporary insurance money for market fund investments. Diana B. Henriques of The New York Times explained this was necessary because “consumers have long considered” money market funds “to be as safe as bank savings accounts.” If Henriques is right, these consumers—who apparently ignored the funds’ voluminous disclosure documents, and who never noticed that if you ask a bank teller to open a money market fund she’ll send you to another room or another branch entirely—used to be wrong in their assumption. But now the rules have been changed to conform to their misconceptions.

If you see bad behavior repeatedly rewarded, you’ll learn to behave badly. Something like that seems to have occurred with my own bank, Wells Fargo, whose president, Richard Kovacevich, reportedly objected to the “relief” being offered (as part of the Emergency Stabilization Act) during Paulson’s closed-door sit-down in October with the heads of nine banks. Yet in the end, Kovacevich accepted the offer of a new government equity stake. And he’d have been a fool not to do it.

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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  • ||

    Holy single entry Batman.

    We are so fucked

    doom
    DoooM
    DOOOOM

    God I need a drink.
    MILTON! Why has thou forsaken us?

  • ||

    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.

  • ||

    Separeated at birth?:
    http://muppet.wikia.com/wiki/Image:Sam02.jpg

  • Reinmoose||

    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||

    "I think what we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work," he said.



    I was playing poker the other night, and kept losing. I now refer to it as a card-failure.

  • Franklin Harris||

    MILTON! Why has thou forsaken us?



    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?

  • ||

    Dictionary: market failure (mär'kit fāl'yər): The market taking a turn I don't approve of.

  • ||

    I think what we're doing is avoiding a market failure that would have forced housing values down in a way that was not in the investors' interest, and in a way that the market wasn't intended to work,


    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||

    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||

    Adam Smith, you say? Adam Smith voted for the bailout!

    Oh wait, that's Adam "no, not that one" Smith. My bad.

  • Invisible Finger||

    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.

  • ||

    "Male hysterics"...priceless!

  • ||

    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||

    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.

  • ||

    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.

  • ||

    "Market outcomes are supposed to be efficient, both allocatively and productively."



    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.

    "When they (market outcomes) are not efficient, we consider them failures."



    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.

  • ||

    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||

    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||

    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||

    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||

    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||

    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.

  • ||

    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.

  • ||

    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||

    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||

    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||

    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||

    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||

    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||

    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||

    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.

  • ||

    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.

  • David Mayer||

    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

    online books | geo news

  • nfl jerseys||

    sghg

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