John McCain was on the news programs today saying that we have to "stabilize housing prices."
John, you're tone-deaf. You're also stupid.
And yes, I mean that: you are stupid.
Housing prices are still too high. They got too high because you and your buddies in CONgress destroyed regulatory structures that prevented excessive leverage over the course of more than 20 years. It was not just Democrats or Republicans that did this, it was both parties.
I can come up with exactly one program that might help with housing, but the problem is that it won't work: Refinance people on an "automatic" basis to below their current market value, with the difference being a balloon note due on sale or refinance.
The problem with this approach is that nobody in their right mind would do it, as it makes them effectively into renters without any of the upside of being a renter (that is, you can walk off when your lease ends.)
There are all sorts of wild and crazy proposals that essentially result in the homeowner becoming a renter, but nobody in their right mind would actually agree to them unless they get the benefits of being a renter, and none of those proposals bring that to the table. They are thus DOA, whether politicians like it or not.
The stupidity of people like McCain (and others) continuing to voice this claptrap is that all it is doing is widening the spread between buyer and seller, thus destroying the market's ability to clear!
I continue to argue that the proper model is to admit that we blew it, admit that the "financial superstore" model of banking is broken, repudiate it and put back in place the structures that kept our financial system safe for fifty years after The Depression.
At the same time put the Bankruptcy Code back to where it was before "reform" under Bush. This way consumers can use the bankruptcy code just as can corporations. While it sucks to go bust it has the salutary effect of removing the debt from the system, and thus is a public good - whether the banks like it or not.
Dismantle the "23A Exemptions", force leverage back to no more than 12:1, bar banks from being anything other than depositories and lenders - that is, bar them from holding anything as an asset other than whole loans. No securitized anything. They're free to securitize but the banks can't hold the paper; if hedge funds and others are willing to do so, then so be it.
Those groups will not re-enter the market until and unless the fraud that laced these markets over the last decade is eradicated and the guilty parties are punished. Then and only then will that capital come back - trust must be re-established, and that cannot happen until the truth is both outed and the game-playing that led to this crisis is stopped - permanently.
As I have repeatedly noted the issue isn't that prices are "too low" for various financial assets. It is that there is a fundamental disagreement between the buy and sell side, with the sellers convinced that prices will "recover" (likely due to government intervention) and the buyers convinced that the market is right (or even optimistic.)
What's worse is that the sellers are "valuing" these "assets" at well above the market price on their books and hiding them in "Level 3", where they do not have to disclose what they're holding or how they are arriving at their valuations.
This sort of price-by-deception simply must cease. It is, in fact, precisely the same game that was played by banks in Japan. They won in the court of regulatory fiat by the government, and managed to convince the government that aiding and abetting their fictions, along with propping them up, was in the "best interest" of the Japanese economy and markets.
How has that worked out folks? Japan's Nikkei was over 35,000 back before this hit them. Now we are in a race with them on the DOW - a cut of some 75% in market value. Real estate not only collapsed but has failed to recover in price. Consumer deflation became the rule and consumers in Japan did their damnedest to pay down debt, further damaging consumption.
All of this is now translating here as our government is doing the very same things that Japan's government did.
Ben Bernanke's theories on how he can halt a deflation as well as how monetary policy influences credit have proved false. We now know this - it is not the conjecture of an intrepid Internet Blogger, it is now historical fact. The monetarists were wrong, the intrepid bloggers correct. We have both Japan's and now our own economies as examples, where the neoclassical folks both tried to run their BS and both failed.
We have a real problem in this nation with the truth. We believe that government can fix all that ails us, when in fact government has never done a decent job of fixing anything. All government has managed to do is make promises they cannot keep, while bloviating and interfering in the process of markets finding equilibrium and thus clearing.
There is a price for a given house, a given MBS, a CDO. It is the price negotiated between a willing buyer and a willing seller - nothing more or less. So long as the government continues to actively interfere in these markets and try to "prop up prices" (no matter where it is) you will see spreads widen and markets remain frozen.
The longer markets remain frozen due to government interference, the worse the damage to our economy, the more people will be laid off, the more businesses will fail and the lower the stock market will sink.
Its really that simple, and that the people in Washington DC, including both McCain and Obama, are too tone-deaf to understand the basics of how markets work, is outrageous.
That we as Americans allow this claptrap to continue instead of recognizing the fundamental truth of how markets work and why interfering with them in this fashion can never succeed is even more so.
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