There’s an interesting piece in The New York Times today, "Housing Woes Bring a New Cry: Let the Market Fall." Here’s a snippet:
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash.
You need to read the rest to understand the logic, and it is logical.
The trouble is, of course, that every plan for jump-starting or fixing or re-energizing the economy is logical. My experience — and I stress that this is my experience and not necessarily the opinion of VAR or anyone else here — is that when it comes to economics, people know squat.
Whether advocating an entirely laissez-faire approach, or preaching the idea of more and better spending, every idea seems logical; there’s always an historical precedent for why this idea is clearly the right one. (The 1920s and early 1940s are favorite examples.)
If we do this, then of course that will happen. Spend a lot even though it hurts — like WWII, it will boost the economy. No, cut spending and cut taxes — that will spur investment. Prop up the housing market until it recovers. No, let it fall to its natural level.
At some point we have to stop and admit that we have no bleeping idea what will work. Economics is just too complex and too full of unintended consequences. Apologies to all the folks out there who know what the solution is, but I have serious doubts.
So maybe the people who are advocating letting the market fall are right. Maybe that’s the bullet we need to bite. I doubt it, but who knows? (Answer: no one.)