Dean Baker on bursting the housing bubble

I think that this article by Dean Baker, quoted in full by Mark Thoma at Economist’s View, is certainly worthy of your consideration.  In the article Dean proposes a deliberate bursting of the housing bubble, largely by talk therapy from the Fed.  I seem to recall that that approach wasn’t paricularly successful in slowing or deflating the stock bubble (irrational exuberance, anyone?).   Take a look at the article and see what you think.

The graphs in Dean’s article certainly suggest that there is, in fact, a housing bubble.  And, speaking as a homeowner in the Midwest where housing prices (and salaries) haven’t gone up nearly as fast as they have on the coasts, I’m concerned about any actions that the government might take to end or mediate the bubble.  Let me explain why.   Here’s a couple of things to consider:

  • Housing construction constitutes roughly 6% of the GDP (from Dean Baker’s article).
  • Over the last 6 years 2/3’s of the net job growth has been in federal, state, and local govement.  Of the remaining third quite some little bit has been in construction.
  • Of the jobs which have a substantial component of (illegal) immigrants which include minimum wage service jobs like fast food and hospitality probably the most remunerative are the construction jobs.
  • Since the credit card deduction was disallowed, there’s been a strong correlation between the increases in housing values and increases in consumption.  People are using home equity loans (on which the interest is deductible) for fairly normal purchases instead of credit card debt (on which the interest is not deductible).  That’s an artifact of tax policy.
  • Since the stock market hit the doldrums almost 7 years ago, housing has been the one investment in which big profits could be made quickly.  15 years of sharp stock increases has spoiled American investors who now believe that large profits are the natural order of things.  A considerable portion of the putative wealth increases of average Americans over the last 6 years has been the appreciation in the value of their homes.

So, what would happen if there were a major turndown in the housing market?

Construction would slow.  That’s what happened in the California market turndowns in the 70’s, 80’s and 90’s.  GDP would contract and unemployment, particularly among (illegal) immigrants, would rise.  If they don’t have the ability to rely on things like unemployment benefits or food stamps, a certain number would turn to crime.

Retail would slow.  This would result in more reduction of employment in that sector.

Technology has been in the doldrums for some time and is just starting to recover.  That would slow or vanish.

As the number of unemployed and people without insurance rose, pressure would be put onto the health care sector—by law, they can’t turn people away.  Health care costs would rise.  Baby boomers, just entering the period in their lives when their health begins to deteriorate, would start getting nervous.

They’d get even more nervous as the value of the houses either stayed flat or even began to decline.  Ten years ago they thought that they’d be able to retire to estates in Tuscany on their stock portfolios.  With the end of the housing bubble and the decline in value of their primary asset they’d begin to wonder if they could afford to retire at all.

With rising unemployment and crime and nervous baby boomers the pressure to do something would be irresistible.   And whatever was done would inevitably transfer wealth from me (who hasn’t experienced the enormous run-up) to people on the coasts (who have).  That’s why I’m concerned.

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