House Seeker, Not House Speaker

Dolors & Sense 

by Sanford Rose

KISSIMMEE Florida—(Weekly Hubris)—11/21/10—House Speaker John Boehner is de trop.*

We don’t need people who deny the basic principles of economics. Subject to much ridicule, the discipline has many flaws but also contains a modicum of wisdom.

The Speaker, however, subscribes to none of this. He says, for example, that the 2009 stimulus did not create jobs because it was based on borrowed money.

Apparently, the contention is that since a borrowed dollar comes out of the pocket of someone who would have spent it anyway, it does no net good. Just raises the public debt load.

That would be true if that dollar, unborrowed, would indeed have been spent. But the key point is that, in today’s environment, this is most unlikely. Corporations and banks have been squirreling away cash reserves for years. Eventually, that money will be either spent or lost. But not now.

An oversimplified but basically accurate example suffices to show what would have happened if the Federal government chose not to be a borrower of last resort.

Say that the country earns $100 in income, $90 of which is spent and the other $10 saved and put in a bank. The $90 goes directly back into the income stream.

But the status of the $10 in bank deposits is uncertain and depends on whether the bank can employ the funds in loans or bonds. If the bank cannot or chooses not to so employ the funds, they become excess bank reserves.

The amount going directly back into the income stream is not the $100 initially derived from it, but only $90. So the country can now spend only $90 in any subsequent round of production. It lost the $10 it thought it had. And the employment the $10 generated.

Theoretically, that reserve cash should serve to lower interest rates sufficiently to induce businesses or households to borrow it.

But that’s not happening.

Businesses show no disposition to borrow, even at rock-bottom rates. At least most businesses. And those who want to borrow are often deemed uncreditworthy by prospective lenders.

Households won’t borrow because they are paying down debt, to a great degree because people like Speaker Boehner keep telling them they are overleveraged.

Yes, the man is definitely de trop.

We can dispense with Speakers who outrage common sense; we need instead seekers of the bargains that are just starting to surface in some, though by no means all, of the country’s long-battered housing markets.

And because the Boehners of this world may survive and even flourish, vetoing sensible additional economic stimulus packages, prospective home buyers need a new type mortgage loan—one that contains an option feature enabling them to insure against the possible continued decline in housing values in any given geographic area. Such a vehicle in fact exists, though the market is unknown to, and neglected by, most mortgage lenders.

Editor’s Note: For the etymologically challenged, de trop is French for “not wanted, unwelcome.”