A reader recently commented that by advocating the position of allowing the housing markets to play themselves out unfettered from government intervention, I was taking a “black and white” view of “free markets” and essentially supporting a financial seizure.
Furthermore, the commenter pointed to the bank run in the UK and further suggested that inaction would lead to a violent downward spiral inevitably resulting in a titanic market crash, worthless currency, bread lines, the breakdown of civility and finally chaos in the streets.
Although I do have a fondness for the taste of human flesh, I’d like to challenge this contention ever so slightly.
First, I think favoring government intervention in the unwinding of the national housing bubbles is actually the more “black and white” perspective as it assumes a measure of certainty about the legitimacy of the action, its effectiveness and more importantly that, through its implementation, greater harm is not being done.
We have to first accept that the housing-lending boom has significantly overpriced residential housing, particularly in the metro areas, and that this mispricing will correct one way or the other.
You don’t have to take my word for it, every conceivable measure of sales, values, mortgage equity withdrawal, homeownership rates, second home ownership rates, homebuilder sentiment, construction activity, realtor membership, and finally a host of popular culture phenomena like “flipping” television entertainment supports the notion that we have just experienced an anomaly of epic proportions.
The correction is upon us but our economy, I believe, is large enough and dynamic enough to resolve the correction without causing actual Armageddon.
By taking intrusive actions, such as allowing Fannie and Freddie to become Jumbo loan lenders, the government would essentially be attempting to fill the vacuum vacated by astute market participants, in an effort to help blunt some of the downside.
But mightn’t those participants vacated for a reason?
Is it sensible for the government to attempt to resume orderly operations of an aspect of a market that the market itself has deemed too risky?
Furthermore, while I do think we are headed for a hard recession as a result of the unwinding of the housing-lending debacle, I can’t imagine that it is constructive to dwell on the worst possible outcome when weighing the costs and benefits of government actions.
Could the coming recession run deep and be widely felt with significant shakeout of sentiment and pullback in consumption?
I think so… But food lines and chaos in the streets? Probably not.
