Just when you think that the bailout mania could not become any more absurd, a “conservative” mainstream economist enters the picture to up the ante of outright stupidity. Martin Feldstein of Harvard, who once served as the chairman of President Reagan’s Council of Economic Advisors, had declared he has discovered the real secret of the current economic downturn: falling home prices!
Yes, just as the advisors to Hoover and FDR claimed that the Great Depression was caused by falling commodity and labor prices, Feldstein insists that falling home prices are bringing down the entire financial system. Of course, no bad theory is complete without a harebrained scheme to accompany it, and Feldstein does not disappoint:
We need a firewall to break the downward spiral of house prices. Here’s how it might work. The federal government would offer any homeowner with a mortgage an opportunity to replace 20% of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. This would be available to new buyers as well as those with mortgages. The interest on that loan would reflect the government’s cost of funds and could be as low as 2%. The loan would not be secured by the house but would be a loan with full recourse, allowing the government to take other property or income in the unlikely event that the individual does not pay. It would by law be senior to other unsecured debt and not eligible for relief in bankruptcy.
The individual could repay the loan at any time or could refinance the remaining loan on more favorable terms as long as the principal did not increase. A 30-year amortization of the government loan would make the payments low, and a life-insurance policy would protect taxpayers if the borrower dies before the loan is repaid. If the homeowner chooses to accept the loan, creditors would have to accept the 20% mortgage repayment, reducing the monthly payments of principal and interest by 20%.
One of the real problems with the economic mainstream, even with those who claim to support free markets, is that they do not understand the simple equation of cause and effect, often confusing effect with cause. It never occurs to Feldstein that a financial bubble is not a good thing, and the only way for a recovery to occur is for prices to fall back to levels that are commensurate with current economic fundamentals. There is no other way.
Otherwise, we will see one bailout scheme after another, just as Hoover and Roosevelt destroyed the economy by trying to save it.
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This just cries out for a parody essay, perhaps discussing the desperate need for the Dutch government to step in and subsidize the purchase of tulips.
Well, being Reagan’s economic adviser he presided over a massive increase in the federal share of he economy. So, the guy is not as smart as we would expect from a well known economist.
Can anyone explain the simple concept of time value of money to these clowns? How does adding more complexity (more computational factors) to an already moderately complex (as viewed by the “average person”) set of equations.
I think these clowns use every means available, including unnecessary complexity, to obfuscate terms that should be in the reach of any individual to understand. Tried reading a piece of legislation lately…give me a break!
The federal government is moving, as Madison said, to perpetrate “…more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations.” The long term unintended consequences of this latest abridegement of freedom should be obvious.
“…the fundamental cause of the crisis: the downward spiral of house prices that devastates household wealth and destroys the capital of financial institutions that hold mortgages and mortgage-backed securities.”
Written by a Professor of economics at Harvard? U-n-b-e-l-i-e-v-a-b-l-e…
To be honest, Feldstein’s paper linked below is much better than his recent WSJ paper:
http://www.nber.org/feldstein/bis2008.pdf
He recognizes that the first of the “contributing causes to the current financial instability” is “The low federal funds interest rate early in the decade.”
It’s very strange that an economist can understand what caused the boom yet not accept that a bust inevitably follows. Feldstein and others seem to be of the opinion that it’s possible (via central bank or legislative machinations) to have either a never-ending boom or a boom followed by a brief plateau or minor contraction and then back to booming. Isn’t it obvious that this is a “Yes! You can have your cake and it too” kind of proposition? I’m not an economist and I’m rather new to Austrian theory, but it just seems like common sense that an irrational boom will always be followed by a painful bust. Why is it that Austrians understand this and so many mainstream economists don’t?
My parents are under the belief that this bailout was necessary. Considering that my Dad works in government contracting for the military, you’d think that even he would understand the economic principles leading to this mess. Sadly, no. It turns out that most Americans who think they understand economics do so because they’ve handled dollars all their lives; they believe that their anecdotal experiences represent the rest of the economy. Marx was right; the processes of production and trade remain invisible to most people in this age we’re in. On top of that, most are either too lazy or busy to scrutinize these processes all the way to the mint.
It’s harebrained all right.
But Washington is replete with the harebrained, ergo
expect it to be adopted.
I share Caveman’s reaction to the apparent willingness of most mainstream economists to sustain an artificial boom. But if I might advance an explanation (Which might be obvious), most mainstream economists (Not just them, but also even most laymen) would assume that they can control the economy. Maybe what we are saying is the last vestige of central planning (e.g.: Keynesian economics) mixed with a lip service to free market capitalism (Which I don’t need to remind was never fully implemented).
Feldstein’s proposal acknowledges that houses are overvalued. What he attempts to do is make the overvalued houses more affordable, so people don’t (or _can’t_) walk away from their homes.
On the plus side, it gives even people with underwater mortgages the ability to stay in their homes. On the other hand, most of these people should still walk away from their mortgages anyways.
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