McCain's First Priority: Repealing the Law of Supply and Demand

In his latest radio address, John McCain responds to Barack Obama's criticism of his mortgage plan (emphasis added):

It's critical that we stabilize mortgages, or else the housing market won't stabilize and homeowners across our country face troubles even greater than they face now. The housing market faces distortion by a glut of low-priced, foreclosed homes. And this would lead to a crash in the value of the number one asset of a majority of Americans. With so much on the line, the moment requires that government act—and as President I intend to act, quickly and decisively.

Where McCain sees "distortion" I (with a mere bachelor's degree in economics) see the interaction of supply and demand. Other things being equal, it's natural that a glut of homes would reduce home prices. The distortion occurs when the government uses taxpayers' money, as McCain proposes, to buy the mortgages on these homes at face value and turn them into fixed-rate, 30-year loans at 5 percent, reducing the size of the principal based on the decline in the value of the homes. Assuming this plan works as McCain intends, the government will be artificially propping up the price of these assets, based on his judgment that market prices are too low.

If there were no principles at stake, I'd love to take advantage of the McCain Resurgence Plan by reducing the principal and interest rate on my mortgage, or at least benefit from the higher sales price he is promising. For that matter, what about the glut of low-priced journalists who are distorting the market for my services, thereby depressing my income?

Comments

[P Brooks]

We simply cannot allow housing to become more affordable; it's outrageous!

[P Brooks]

Where McCain sees "distortion" I (with a mere bachelor's degree in economics) see the interaction of supply and demand.

Especially if you look at it terms of supply and demand for money.

[phalkor]

Right, the obsessive financial nitwits I hear screaming "FIX IT!" can't stand to live with equilibrium. Why can't prices go down, is that really such a disaster?

Can these people really say with a straight face that the market only works when prices only rise?

I'm no homeowner, but I want my bailout damnit! (Or no one else can have one!)

[brotherben]

mrs. brotherben and I are hoping to use the glut to take our poor asses and do some movin on up. It looks as though both parties wanna screw that up.

[David T]

If we let prices continue to decline, poor people might be able to buy houses!

[phalkor]

David T, weren't poor people buying them when they were expensive? Hence, the problem?

[brotherben]

David T, we can't let that happen seein as how they cause this whole friggin mess to begin with.

[juris imprudent]

If we let prices continue to decline, poor people might be able to buy houses!

Worse then that, they'll be able to do so without the govt having a say in it!

[D.A. Ridgely]

For that matter, what about the glut of low-priced journalists who are distorting the market for my services, thereby depressing my income?

Not to mention the even bigger glut of substitute goods bloggers like me who don't even get paid for what we sometimes whimsically pass off as commentary!

I, for one, however, am willing to accept massive federal funding in return for which I will make my blog site subscription based (look how well it worked for the NYT!) and thereby reduce your competition.

That's okay. Don't bother thanking me. It's the least I can do.

[juris imprudent]

Normally, you don't win the thread with a set up line, but I think David T deserves this one.

[fyodor]

David T, weren't poor people buying them when they were expensive? Hence, the problem?

Part of the problem. Let's amend David T's post, shall we, to say:

"If we let prices continue to decline, poor people might be able to afford to buy houses!"

[Blue]

PONY
PONY
PONY
GIVE ME MY PONY

[J sub D]

J sub D | September 6, 2007, 10:53am | #

Who am I supposed to bail out? People who took mortages out on houses they couldn't afford, or those who gave them the mortages? To both groups my response is "You made your bed, now lie in it."

Oh yeah, "And quit whingeing".

This is all so fucking wrong. When Paulson first proposed the 700 gigabuck bailout (remember the good ol' days?) I predicted the final cost wiould be 1 terabuck minimum.

I'm now betting the final tally for rescuing people up and down the chain will be $1,531,627,104,843.38 (that's one trllion, five hundred thirty one billion, six hundred twenty seven million, one hundred four thousand, eight hundred fourty three dollars and thirty eight cents.

Give or take $100,000,000,000 (one hundred billion).

[Isaac Bartram]

DAR, in the coming depression the new administration will set up a WPA Bloggers project.

You guys are set, man.

[John Imrie]

How many people are actually WINNING here in the housing slump, people are getting a leg up because housing prices are low. Artificially inflating them seems to be cutting low income folks out of the market.

[Isaac Bartram]

John Imrie

Housing prices have a long way to go to reach the classic 2.5X to 3X annual income rule of thumb in most markets.

On the other hand there are millions of homeowners who are not in trouble on their mortgages (and don't give a shit about people who are) who are seeing the value of their major asset going down in value. They don't want that to happen and they vote.

And they're going to vote for the guy who has the most convincing "Repeal the Law of Supply and Demand" program.

[parse]

With so much on the line, the moment requires that government act-and as President I intend to act, quickly and decisively.

If the moment really demands quick government action, anything McCain can do about it after he becomes president really isn't relevant. Unless the moment lasts a good two months.

[MikeP]

Rather than trying to fight the low demand for the high supply of houses by artificially propping up prices, the government actually does have a free market solution to increase demand and thereby naturally support house prices...

...immediate permanent residency to any prospective immigrant who buys a house with a legitimate mortgage and 20% down.

[L.R.]

There's another option to dealing with the glut: start burning them to the ground.

[LarryA]

And this would lead to a crash in the value of the number one asset of a majority of Americans.

When will these politicians realize that for the vast majority a home isn't an "asset" it's a place to live. As my wife says of my gun collection, "It isn't an investment until you're willing to sell it." True, my home is worth priced at double what I paid for it. But as soon as I sell it, I have to buy another home to live in, and that house's price is double also.

Meanwhile the tax valuation has also doubled. Guess who wins that round?

Can these people really say with a straight face that the market only works when prices only rise?

I'd like to see them apply the same "logic" to computers.

[joe]

Five percent?

The hell?

I paid points and I didn't get five percent.

[MikeP]

True, my home is priced at double what I paid for it. But as soon as I sell it, I have to buy another home to live in, and that house's price is double also.

David Friedman's Price Theory makes a similar point. Are you better off if the price of housing goes up? Are you better off if the price of housing goes down? You are, in fact, better off if either happens than if neither happens. Either one provides choices you didn't have before, and either one allows you to move to a budget tradeoff between housing and other consumables that has higher utility than your original budget tradeoff.

Under "Application: Housing Prices--A Paradox" halfway down is the verbal argument...

What matters to you is what you consume--how much housing and how much of everything else. Before the price change, the bundle you had chosen--your house plus whatever you were buying with the rest of your income--was the best bundle of those available to you. If prices had not changed, you would have continued to consume that bundle. After prices change, you can still choose to consume the same bundle. The house belongs to you, so as long as you choose to keep it, the amount of money you have to spend on other things is unaffected by the price of the house.

You cannot be worse off as a result of the price change--at worst you continue to consume the same bundle (of housing and other goods) as before. But since the optimal combination of housing and other goods depends, among other things, on the price of housing, it is unlikely that the old bundle is still optimal. If it is not, that means there is now some more attractive alternative, so you are now better off; a new alternative exists that you prefer to the best alternative (the old bundle) that you had before.

[MikeP]

Of course, Friedman's argument does not apply to people who in fact did not buy their house using any reasonable definition of "buy", but are instead taking advantage of cheap rent until the bank can kick them out ...or even those who, in fact, don't even live in "their" house.

[Brown Stain Special]

...immediate permanent residency to any prospective immigrant who buys a house with a legitimate mortgage and 20% down.

As long as we build a 50-foot high fence around their house, I'm OK with that.

[ALF]

Willie: Some people are so blinded by the thirst for money, that it causes them to lose their values and do things they shouldn't do.

ALF : Well, that explains Ghostbusters II.

[MJ]

"The housing market faces distortion by a glut of low-priced, foreclosed homes."

Which presumes that the high homes prices caused by overly easy credit is not the market distortion in the first place. It is not a good idea to try to artifically unpop a bursting bubble. The least painful thing long term to do will be to let the market find its equilibrium, else we are going to dealing with the bad effects of this for much longer time. McCain told us he is weak on economics. Idiot might be a better word, and a populist one at that.

[swede]

Hey, does anybody remember a political party some years back that actually gave a shit about how the market works and respected it for the most part? i think their name started with an "r." reblican or something like that. i remember that they used to matter.

[Ebeneezer Scrooge]

I remember when they used to at least talk about giving a shit about markets.

But that all happened BB&Mc (Before the Bushes and McCain).

I also remember reading about these big huge things called dinosaurs that once roamed the face of the earth. They could have flattened a few of those excess houses for us.

[Ebeneezer Scrooge]

I'm no homeowner, but I want my bailout damnit!

Well all you need is a magic decoder ring. It's called A HOUSE.

They say there are just shit loads of them out there, you might see if you can find yourself one.

[Ebeneezer Scrooge]

they're going to vote for the guy who has the most convincing "Repeal the Law of Supply and Demand" program.

No, not this time around. This time they're going to vote for the Big Bama Mama. Because we all know that socialism is better for us.

The only alternative is a very old dog and his buddy the moose woman.

[JW]

McCain proposes, to buy the mortgages on these homes at face value and turn them into fixed-rate, 30-year loans at 5 percent, reducing the size of the principal based on the decline in the value of the homes.

We'll make sure you never again engage in such risky investments! Bring out the comfy chair!