Tom Campbell

The Housing Package: More Risky Behavior, and More Inflation Feb 18th

The White House has announced a plan to spend an additional 275 billion dollars in the mortgage area, on top of the almost 800 billion in the ”economic stimulus” bill. Of the 275 billion, 75 billion would be used to give money to banks to induce them to renegotiate mortgage terms with distressed homeowners, or with homeowners who are still current but whose homes’ equity is less than the amount they owe. The 200 billion additional money would go to the two large mortgage re-insurers, Fannie Mae and Freddie Mac, to get them to insure mortgages at 5%, with less than 20% down (how low a down payment is left unspecified).

Here we go again! The housing problem started because individuals were allowed to get mortgages, with Fannie Mae and Freddie Mac approval, with very low, if any, down payments.  When a homeowner is not required to make any significant down payment, the homeowner has no incentive to stay in a house when its value drops. That’s what has occurred as the housing bubble burst.

Rather than encourage these risky mortgages, it would have been far better to urge people to rent a home until they had enough money saved to make a reasonable down payment. By encouraging people to take out a mortgage with a low, or no, down payment, the federal government is engaging in false compassion. There is no harm, or shame, in renting, until one has enough for a stake in one’s home. Indeed, that’s the American way, most of us expected and followed. There is harm, however, in taking on a promise to pay for a home that might not be possible to keep; and then walking away.

Further, none of this new sum of 275 billion will go to create new jobs. Not a dollar! There are other parts of the “stimulus package” that granted federal government subsidies to new home purchases, but don’t purport to encourage risky mortgages. Making new houses a bit cheaper might do some good for the housing sector. I can see some new jobs resulting from that. However, the lesson of the housing melt-down has to be learned: rent until you can afford to buy, and don’t fool around with the mortgage markets, saying a borrower is credit-worthy when she or he really isn’t.

Finally, the 275 billion does not drop from the sky. We’re not cutting spending somewhere else, and we’re not increasing taxes, to come up with it. So it’s an additional amount of federal goverment money-printing. That will come back, roaring back, as inflation as soon as the economy begins to turn around. We’ve already printed 160 billion under Pres. Bush’s tax rebate plan of last summer, 700 billion under Pres. Bush’s stimulus package, $789 billion under Pres. Obama’s stimulus package: to all of that, we now will add 275 billion more. That’s a whopping 1.9 trillion dollars since last summer! The amount of money in our economy (”M2″) is about 8 trillion. So we’ve increased the money supply by almost 25%. Pick any level of real growth you think we’ll achieve during the recovery (which will start in about two years). Say it’s 5% (which would be very optimistic). That leaves 20% of the monetary growth to be accounted for by inflation. That’s the hard truth of printing money. It comes back as inflation, unless you stimulate even more economic growth.

Could the 1.9 trillion dollars have been better spent?  Absolutely–in creating jobs directly. States have public works ready to start, they would employ people, and they would build permanent improvements like roads, airports, and water projects that would help us be competitive for years to come. We could lower the cost of hiring a new employee: the federal government imposes a 15% FICA tax on employees’ wages: why not use some of the 1.9 trillion to suspend that tax for hiring a new employee, who has been out of work for a couple of months or more? Or how about lowering the cost of expanding a store, or manufacturing plant, which would bring on new employees, by expanding the investment tax credit?

The key to getting people employed is to make it more attractive for employers to offer jobs. No employer I know will offer new jobs based on the one-time spurt in demand caused by a rebate check (Pres. Bush’s 160 billion), or a $1,000 reduction in the amount of a mortgage (part of the proposal). But new jobs will start when employers see that the real cost of expanding their operations has dropped. And those new employees will provide a much more permanent jolt of consumer spending than any one-time government check.