David Gregory’s Question Deserves an Answer

David Gregory's Latest Tweet:

Q for Obama on housing: does keeping people in their homes (who can't afford to be there) help the economy or is it only social policy?

deserves an answer…

With apologies to President Obama, I'm going to answer it, even though I am just a regular guy; not an economist, or even a genius.

Before the Republicans took over the economy, it was possible for a family to own a home with one income, and the economy boomed at almost all levels for the first 28 years after World War II. The economy started to hit the skids while Nixon was president, and we never really recovered, because Ronald Reagan threw the entire economy into supply-side nonsense. Bill Clinton had the economy on the right track in the 1990s, with the first real increases in wages since 1973, but Gramm-Leach-Bliley put the economy back on the skids.

The problems that President Obama and the Democratic Congress face were a long time in the making, and they stem from several decades of mismanagement, and an economic model that was unsustainable in the long run. If you look closely at the economy in the post-war period, it was marked by a constant investment in infrastructure, a strong manufacturing base, and an almost constant investment in technological development.

Beginning in the early 1970s, that economic model stopped abruptly, and by 1981 the economy was almost fully devoted to funneling money to the investment sector. Investment in various instruments became the key to economic growth. Look at the stock market. In the post-war period, it took until late 1972 for the Dow to hit 1000, and another 23 years to hit 5000. Yet, it hit 10,000 in four years, and less than a decade later, it hit 14,000.

While the stock market boomed, the rest of the economy largely stagnated. Rather than making items and selling them to the public, participants in the economy started making money from the mere act of investing. If you look at the economy since the 1980s, it's been a series of bubbles. First, the stock market, then real estate, then commodities, then the "tech" bubble, and on and on. The last bubble, the latest real estate bubble, was the ultimate manifestation of this era, in which real estate values were overinflated by fraud, essentially.

What am I getting at here? And what does this have to do with David's question?

We have to return to the old economic model; the same economic model that has allowed so many other economies to catch up to us.

The assumption in Mr. Gregory's  question is that people who are facing foreclosure somehow can't afford their homes because they don't have enough money. That is true in some cases, but in many cases, homes became overpriced, because a bunch of crooks/mortgage brokers manipulated the laws of supply and demand. By creating mortgage instruments that no one understood, and using them to sell homes to people who couldn't afford them, caused other home prices to become overinflated. As a result, many people purchased homes at more than the home was worth.

Just as the price of gold once hit around $1000 back in the early 1980s, and fell back to earth; just as the first (less severe) real estate bubble burst and caused real estate to drop back in the mid-1980s; just as the NASDAQ crashed in 2000; just as oil prices crashed after speculators pushed them as high as they could go last year; real estate prices were destined to go back to their natural level.

Keeping people in their homes is not just "good public policy;" it's an absolute necessity. for making the economy whole again. Empty homes depress home values even further, which puts everyone's investment in jeopardy. There are many ways to do this; refinance at a lower interest rate, extend the mortgage to 40 years from 30; refinance at the current value of the home; whatever has to be done will help everyone, including those people who are almost finished paying off their home,. Keeping families in  the other homes in a neighborhood actually protects the value of your home. By keeping 4-5 million people in their homes, you're protecting the investments of tens of millions of others. 

I would also point out that this isn't just individuals' homes we're talking about saving here. Many renters live in income property that is in danger of foreclosure, as well. And the Mesa hotel that President Obama stayed in last night was chosen precisely because it's almost new, and is currently facing foreclosure.

Yes, there are a few people who don't make enough money to stay in their home, but they aren't representative of all of the foreclosures. If 90% of the foreclosures can be averted by changing the terms of the mortgage, then it's a win-win. It's not only good social policy, but it will be great for the economy.

Click here for reuse options!
Copyright 2009 The PCTC Blog