What is seen and …

There are truisms in economics.  Frederick Batiat didn’t “invent” the broken window no more than Adam Smith invented the invisible hand nor Isaac Newton invented gravity.  All were simply observations of naturally occurring phenomena.

U.S. Loan Effort Is Seen as Adding to Housing Woes

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

When the NY Times reports this, then the news has to be very bad.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

It’s good that the article makes clear that fallacy of intervention.  And the “necessary cleansing process” would of course be the real recovery, the required liquidation of malinvestment.  One wonders if the author has ever heard of the ABCT?

Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.“Then the carpenters can go back to work,” Mr. Katari said. “The roofers can go back to work, and we start building housing again. If this drips out over the next few years, that whole sector of the economy isn’t going to recover.”

No!!!  Only after the liquidation can resources be directed to more productive ends.  Putting carpenters, et al., back to work is not that.  The administration’s goal of propping up housing prices has delayed recovery, and worse, hurt the economy.

But here’s where the author falls into Keynesian fallacies or perhaps recognizes the administration’s Keynesian errors:

But behind the scenes, Treasury officials appear to have concluded that growing numbers of delinquent borrowers simply lack enough income to afford their homes and must be eased out.

It isn’t incomes at all.  It isn’t about incomes matching housing prices.  This is the Keynesian fallacy about income and spending.

“I don’t think there’s any way for Treasury to tweak their plan, or to cajole, pressure or entice servicers to do more to address the crisis,” said Mark Zandi, chief economist at Moody’s Economy.com. “For some folks, it is doing more harm than good, because ultimately, at the end of the day, they are going back into the foreclosure morass.”

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.

Increasingly, such borrowers are inclined to walk away and accept foreclosure, rather than continuing to make payments on properties in which they own no equity. A paper by researchers at the Amherst Securities Group suggests that being underwater “is a far more important predictor of defaults than unemployment.”

From its inception, the Obama plan has drawn criticism for failing to compel banks to write down the size of outstanding mortgage balances, which would restore equity for underwater borrowers, giving them greater incentive to make payments. A vast majority of modifications merely decrease monthly payments by lowering the interest rate.

Of course, a new initiative this time will work because even though all the others have failed…  What is truly amazing is that it is presumed acceptable that one can walk away from a house because of no or negative equity.

The best passage is the “compel” part, because that is exactly what this administration is about: force and compulsion.  If you don’t hew the administration line, then you’ll be forced to.

Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. He pointedly rejects the notion that government ought to get out of the way and let foreclosures work their way through the market, saying that course risks a surge of foreclosures and declining house prices that could pull the economy back into recession.

How that would happen, or even why, nobody ever seems to explain.  Perhaps it’s because they can’t, because it won’t.  Housing prices have absolutely nothing to do with anything.  They, as all prices do, simply reflect the current market clearing price.  There is simply no way falling home prices have any effect on the economy.  None whatsoever.  However, the housing boom, the constant refinancing, flipping, et al., did create the malinvestment and bust.  So, propping up home prices artificially will only prolong and deepen the crisis.

As of mid-December, some 759,000 homeowners…

If you put nothing down and paid interest only on the loans then you aren’t an owner.

“Almost three-quarters of a million Americans now are benefiting from modification programs that reduce their monthly payments dramatically, on average $550 a month,” Treasury Secretary Timothy F. Geithner said last month at a hearing before the Congressional Oversight Panel. “That is a meaningful amount of support.”

But mortgage experts and lawyers who represent borrowers facing foreclosure argue that recipients of trial loan modifications often wind up worse off.

Three quarters of a million Americans benefitted…tens of millions were harmed.  And still, they end up worse off.  Well of course they do.

What the article clearly misses is the unseen.  Those who were duped into “buying” homes with little to no ability to make the payments could have used the money for other, better, purchases.  In artificially creating millions of new home “buyers”, vast resources were diverted to building these homes which ought to have gone to other, better, uses.  In bailing out the banks and the “buyers”, billions are stolen from taxpayers which ought to go towards other, and better, uses.  And still, all the intervention in the world will not stop the markets from doing what markets do best: evaluate and allocate resources.

At least the NY Times recognizes that the housing bailouts are a failure.  Maybe they’ll see every intervention results in the same.  What was true in 1850 is still true today: there is no gain from destruction, and we must always look at what is seen and what is unseen.


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