House of Cards

Housing starts fall again. We may not see a rebound for a long time -- and if we do see one soon, that may actually be a bad thing.

Both Dems and the GOP created a housing bubble by encouraging lenders to make loans to people who weren't good risks through policies at Fannie, Freddie and FHA that tended to hide those risks. When we finally had a cyclical recession bad enough to shake out the weak hands, the effect snowballed across the economy, freezing credit markets, costing taxpayers trillions in bailouts, and pushing unemployment higher. (This is an object lesson in the foolishness of chasing social justice and aggregate demand with government-sponsored market distortions -- real growth and real prosperity come from productivity improvements.)

Now we have too much housing. Just like with all bubbles, It's going to take years for the excess supply to be sopped up. That's good news for people buying homes, but bad news for anyone in construction.

The bloodletting may not be over yet. A double-dip will shake out yet more weak hands, and I see no indication the Obama admin has learned its lesson -- they seem to think re-inflating the bubble with more incentives and risky loans is their best option. Those who don't learn from history...

UPDATE: More here.

From reading Matt Ridley and Ray Kurzweil though, there's something I think is missing from the multiplier debate -- the private sector of 2010 is far, far more productive than that of of 1950 (in fact, today's poverty line is about where the average income was then). Government... not so much. Thus, it could be the mutliplier was once over 1 but has since fallen below it, due to the relatively dynamic nature of the free market.

posted by Dave on 07.20.10 at 10:35 AM










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