Hobson’s Choice

Dolors & Sense

by Sanford Rose

KISSIMMEE, FL—(Weekly Hubris)—9/13/10—There is a lot of nonsense in the press about the need to get the government out of the housing market.

Of course, without government, there would be no housing market. But conservatives argue that government must stop supporting housing—principally via low interest rates, guarantees, and direct borrower assistance—in order to allow house prices to fall to their “natural level.”

As some see it, the government has a choice between keeping house prices high (thus protecting current homeowners) and allowing them to fall (thus helping future homeowners).

Balderdash!

If house prices continue falling, the economy stands an excellent chance of double-dipping. Should that happen, there will be few customers for houses, even at tobogganing prices.

The unemployed don’t rush to buy houses. And when prices are falling, even those with the money to buy won’t do so because prices are apt to keep falling. So why get stuck today with a property that will be worth less tomorrow?

The government has no choice except to buttress house prices—and far more vigorously than it has heretofore.

The chief problem with the government’s reaction to this recession is that it is too limited and piecemeal, based essentially on a misguided confidence in the economy’s power of self-renewal.

The economy has renewed itself in the past because most past recessions were mild, themselves creatures of central bank overzealousness in restraining inflationary impulses.

This recession is different. It threatens to change in a long-lasting and fundamental fashion the economic behavior of millions.

That behavior may have been counterproductive but, when even counterproductive economic behavior changes too abruptly, the results are usually unfortunate.

People should not overspend. But when they suddenly start over-saving, that’s bad.

That’s what has happened. When everyone becomes a tightwad, it’s up to government to try making up the spending shortfall. It is only half-trying, hobbled both by conservative opposition and its own lack of foresight and resolution.

It must spend more, especially in the area of housing. People have shifted from thinking of their houses as ATM’s to thinking of them as sinkholes.

Any reasonable effort that buoys confidence in what people used to regard as a substitute for life insurance is worth undertaking. Any measure that reduces the perceived risk of acquiring real property is worth trying.