It's been so quiet around here. Actually it got a little busy at work, which is nice. I also don't want to keep hashing over the same thing over and over and over again, especially since appears to be so in vain.
But here I go again.
The Treasury Department is considering giving new home buyers an interest rate of 4.5% to goose the home buying market and "stabilize" home prices.
This is a bad idea for several reasons, namely that a bank that is pressuerd to give an interest rate that low will lose money on the deal as inflation will swallow the nominal interst rate within a few years and leave them with a negative real interest rate.
"But wait!" you say. Most homeowners sell or refi within five years (I've also heard three or seven, but that doesn't matter). What policymakers rarely do (and almost never do correctly) is consider that monkeying around like this changes peoples incentives. If you have a locked interest rate of 4.5% you're not going to refi--or would be very hard pressed to do so. Also, all things equal, you would be less likely to sell. We have the incentive to purchase a home now counterbalanced by the incentive not to sell or refi in the future.
Further, with the banks realizing negative return on investment, what is to stop them from crying poor-mouth to the federal government and asking them to help them out of the mess that the government put them in? Of course under this scenario, I believe they would be entirely justified in doing so.
The Community Reinvestment Act, which did play at least some role in our current mess, is an example of what can happen when politicians seek political means and ends to economic activity. We have entered what appears to be a nasty cycle of moral hazzard. All, of course, in the name of "best intentions."
reason magazine has several great articles in its January issue that I will link to here when they become available.
One already is: here. It effectively cuts the argument that President Bush was some fan of limited government or regulation. The lack of regulation is not what caused our current problems.
Open markets are the most effective and efficient way to set prices.
Government efforts to help only make things worse. History is replete with examples, but FDR extending the Great Depression and Nixon making a disaster of the 70s through wage and price controls are just two examples that spring to mind.
Markets clear, government gums them up.