As we dig out from the rubble of the housing bubble, calls for more government regulation / involvement abound, including Alan Blinder's piece in Sunday's NYTimes.
But let me just play devil's advocate and suggest that perhaps the problems we encountered didn't arise from insufficient government involvement, but rather that government involvement actually helped cause the problems.
1. There has been and still is a huge government push for people to buy houses. We give a tax deduction for mortgage interest, even on some types of second homes. We have a plethora of policies to make homeowners out of everyone.
2. Our monetary authority, in its infinite wisdom, sometimes pushes interest rates extremely low, encouraging people to borrow a lot and for some investors to take unusual moves to chase returns.
3. Uncle Sam is known to have a soft heart. He is a sucker for a sad story. Put another way, Uncle Sam is a moral hazard creating machine.
While I am sure we will get more regulation, and as suggestions go, some of Blinder's are pretty good, I don't think it's correct to view the housing bubble as an example of the free market going nuts on its own and government having to step in to fix a private sector problem.
4 comments:
Why did other countries like England and Australia have similar housing booms if it was a consequence of government action? To the best of knowledge, these countries do not incentivize home ownership.
In Romania too there was (is?) an extraordinary increase in housing prices, including rents, a lot faster than CPI or nominal GDP or whatnot.
I agree with #2 & #3 b/c:
The global housing boom was caused by low global interest rates. Low global interest rates were the result of the dollars prominence and the Fed's action domestically. eg. there would be arbitrage if US rates were very low and foreign rates did not follow.
I'm sketchy about #1 though, b/c aren't these incentives already priced into the value of the housing market? There was no change in policy that caused the recent boom. They may have contributed to spikes when they were implemented, but now aren't they just a regressive tax break?
There's been much too much discussion of this thing which has not included the Warren Buffet quote: 'when the tide goes out, that's when you can see who has been swimming naked'
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