This is really happening, snap out of it!

top of
the pyramid has
been preserved. Gilded,
braced, restored to fully functional.
The world looks in at us and sees the market
as it’s used to viewing us; stable banks, open markets,
investors wheeling and dealing without fear of the collapse
that appeared to be looming just a few short months ago. However,
the top of the pyramid was never, in reality, what threatened the stability
of the structure. It is always the foundation, the individual, that determines the
overall strength of the economy. Are houses actually worth less than they were 2 years
ago, less functional, less able to be lived in, or is it the perception that they can not be paid for
in the current economic climate of high unemployment and low wages for those who still have jobs? Is that fear unjustified? How does a government keep people paying for homes when the people are told that the homes aren’t worth what they have to pay for them, may never be worth the price, no return on their investment? Why would a sane person buy into this housing market and throw their money down this hole? Bargain or bubble??? Sadly, still bubble, until wages are addressed. There will be no rebound in consumer spending because there is no foundation underneath the individual and the market teeters on the publics
Hey look, a Christmas tree, just in time for the holidays! I suppose I should put some presents under it. In keeping with the holidays, how about some faith under the tree? Stop looking at these times as anything more than what they are; a reminder of what is important to the vitality of this country, the individual citizen. Have some faith in us. We will pursue what is in our best interests, always, and buying into a declining housing market doesn’t sound that great to us. So how do you fix that? Stop looking at housing as a commodity (it is in the most general sense) and start looking at it the way most working people do, as an investment. What do most people do with the equity they build in their homes? Use it to obtain a second mortgage for their children’s education or for some other large expenditure. Instead of throwing money down a current hole (that really doesn’t exist, you know), offer people an inducement to stay in their homes through these bad times, accept the TEMPORARY devaluation of their investment, battle out the recession, take in a border, a family member, make sacrifices and in return the government would guarantee (say in 10, 20, 30 years) a return on the money they would have spent trying to keep the bubble inflated now. Maybe a free college education? A upgrade to more green tech for their homes? T-bills? Make us an offer, see how it goes.
You know, I ‘ve been saying this for months, now. Sometimes I feel like I’m talking to myself.
When there is a crisis, you can’t look at the future through a prism formed from the pressures of that crisis. You have to assume that life will go on, things will get better; time heals all wounds including economic ones. Months ago, I started talking about the discrete and the continuous as concepts of time. The discrete is the individuals lifespan, time on the micro scale. The continuous is Time, past and future including the present, time on the macro scale including the micro scale. What I neglected to do is to point out how useful this concept can be in problem solving. I thought you would naturally grasp it and wonder about it as I did.
Let’s use the housing/mortgage default problem as an illustrator: houses are currently valued approximately 30% under mortgage values from 2 years ago, yet people are still trying to get 2007 prices when they sell their homes. A $450,000 house should sell for approx. $325,000 adjusting for CURRENT market price. Who takes the hit, the buyer or the seller? No one chooses to and the market grinds to a halt. Chaos ensues; I would consider that an unacceptable turn of events. If all houses sell at full mortgage value, the bubble is perpetuated. If all houses sell at current market value, a deflationary spiral starts. Both of those I would consider unacceptable turns of events as well. What can be done? There isn’t enough money in the world to stuff into that scenario to make it work. The deer in the headlights look sets in and everyone sits back and waits for the inevitable collapse.
Is a $8000 or $12,000 tax deduction really going to offset a potential $125,000 difference in valuation? What would keep someone from taking the deduction and then later coming to their senses and walking away from the underwater loan?
This is that market viewed through the prism of the present, the discrete, the micro.
I choose to believe there is always a solution and if it doesn’t exist in the discrete it must be it the continuous. What are the functions of houses? Shelter and investment: houses in the past, present and future will provide shelter but what about investment? Isn’t that the question, will houses continue to be a good investment? Wouldn’t it be smart to assure potential buyers that their homes would have the value they are paying for at the end of their loans? How could you do that? Take that tax credit, invest that money and tell the home buyers the truth; the house you are buying is not worth the mortgage value BUT your government guarantees it will be worth at least that at the maturity of the loan and to prove it we will provide essentially a second mortgage back to you from that invested tax credit plus accrued interest. If the government did it just right, they could return 5% compounded, while earning 7% compounded using the difference to offset the initial principle investment. I’m not an economist, but a variation of this could work and certainly would work better than a tax credit.
Time is our ally, use it.
And don’t ever be scared.
You were scared, weren’t you?
By the way, what am I getting for Christmas?