Responsible Regulation of the Housing Market?

One of the more difficult aspects of understanding economics is the fact that in many cases, it takes a long time for the full affect of these policies to work themselves through the economy. This then leads to the difficulty that people have in identifying the actual cause and effect of the policy that was originally introduced.

One of the more difficult aspects of understanding economics is the fact that in many cases, it takes a long time for the full affects of economic policies to work their way through the economy. Because of this fact, it can be difficult for people to identify cause and effect.

This allows those responsible for the economic policies to avoid blame because what they started…and continued…began a long time ago and it is difficult for people to identify these specific policy makers as the culprits for what is currently taking place. In my estimation, one has to go back six or seven years to find the beginnings of the monetary and fiscal policies that have resulted in the present dilemma. One has to go back even further than that to find the beginnings of the United States energy policy that we currently find ourselves paying the price for these decisions.

In addition, since it is much easier to place, the blame on something that people are, doing now rather than on what people did a while ago; our leaders can point their finger at speculators, at dishonest real estate brokers and lenders, and at foreigners as the perpetrators of our current problems. Furthermore, if our leaders can shift the blame to these villains then they can escape from dealing with the hard problem of correcting the economic policies that really did create the situation. (See Paul Krugman's article  in the June 27 New York Times, “Fuels on the Hill.")

The ultimate problem that results from a situation like this is that policy makers usually end up facing a real dilemma. Let’s pretend we are the Chairman of the Board of Governors of the Federal Reserve System. What is the dilemma we are in, if we are the Chairman of the Board? The value of the dollar has been declining for over six years. People are saying that the fall in value has helped to fuel the increases in the price of commodities worldwide, especially that of oil.

They are also saying that this decline in value has resulted in a flood of United States wealth flowing into other countries…to the Middle East, to China, to Russia, to India, to Brazil…and this is going to come back to bite us. In addition, now, other central banks around the world are considering raising their interest rates, which will only exacerbate the situation. We should raise our target interest rate to help strengthen the value of the dollar…or at least protect it from declining more.

However, if we raise interest rates that will only cause further economic distress and dislocation here in the United States and our financial institutions are not that strong…some forecasters are saying that some banks are going to have to write off another $65.0 billion in assets. Unemployment is increasing…home foreclosures continue to rise and housing prices continue to fall…the auto industry is in the tank…and so on and so on…

This is the problem of mismanagement…of getting away from fundamentals…of letting ideology dominate reality. Bad management results in situations in which there are no good or easy choices available. Something needs to be done about the value of the dollar, but at what price are we going to have to pay to strengthen the value of the dollar? We can continue to postpone the day of reckoning…but the longer we postpone that day…the greater the cost will be!

Another rule in economics is that the day of reckoning does ultimately arrive!

One of the short run responses to the current situation is to change regulations…to create programs that alleviate the problems created by the economic distress being experienced. An example of this is the effort to produce a housing bill that will help people who face the possibility of losing their home…and most or all of their wealth. People want to help those in dire straits. There is no question that this is a worthy cause. However, are legislators want “results!”

Short run solutions always focus on “results.” One can understand that politicians want programs that create “results” so that can justify the expenditure of large amounts of money. Individual personal problems are a great help to politicians in generating a rationale for the legislation they want to enact. In addition, individual personal success stories are a great help to politicians who are explaining to voters why they should be re-elected. However, programs that are based upon the achievement of “results” hardly even come close to achieving what is needed or what is expected. “Results” are based on idealistic goals and objectives and seldom have any relationship to the reality of the situation.

Furthermore, “results” based legislation sets up rules and procedures from which people can take gain some advantage. The writers of the Housing Bill seem to be aware of this and are concerned about how the bill will be administrated. Still, “results” orientated programs are taken advantage of because there always seems to be many individuals that find ways to circumvent the rules and procedures to their own benefit.

One final point on this issue relates to the organization that is going to administer the new Housing Bill. The designated institution in this case is the Federal Housing Administration. This is a problematic institution, and has correctly been criticized for its weaknesses. What other organization need to be involved - Fanny Mae (FNM) and Freddie Mac (FRE). Oh, boy, where is FEMA when you need it?

There is another issue to consider in the creation of legislation and additional regulatory oversight. This is the issue of time. One of the big problems that regulators have in today’s environment is that things change so rapidly. Let’s just look at the housing market that the congressional leadership is attempting to help. Earlier this year it was estimated that the number of homeowners having financial troubles with respect to paying their mortgages was around 2.6 million. The figure is currently said to be around 3.0 million. Within the next year or so analysts are forecasting that another one to two million will be added to this total. The Housing Bill’s aim is to help around 400,000. What will be the response to this shortfall? According to legislators, more housing bills will have to be enacted.

The other side to this is that legislation and regulation always tends to fight the last war. That is, legislators are responding to the behavior of individuals and the market instruments they believe got us into the current situation. My experience leads me to believe that while the legislators are responding to these historical issues there are already some people, somewhere in the markets thinking about what can be done in the future. Legislation and regulation will not be created to deal with these “new things” until sometime after they have been introduced, and only after the need for some kind of oversight becomes evident.

Leaders in the United States have some hard decisions to face. The question is whether they will deal with them in the near term, or, will they, in whatever way that they can, postpone the hard decisions to some undefined time period in the future. What is sad to me is that the leaders seem to be postponing the hard decisions once again. This is why I believe that there is a growing discussion around the world about the credibility of those guiding the country at this time. Can you imagine China questioning the credibility of our economic policy makers?

 

Comments

[rm:]

[The Housing Bill’s aim is to help around 400,000. What will be the response to this shortfall? According to legislators, more housing bills will have to be enacted.]

When you ask, "What do I need?" of the man with a hammer in his hand, his response will always be, "More hammering."

It's my position that no legislator truly wants to "solve" any problem. It's enough to say that one sponsored, or voted for, legislation that "responded to the problem."

Attaining and retaining elected office is hard work- that's the real work of a legislator. It's difficult keeping up with the changing tides of problems that the public deems "important." Best to wring as much as you can out of any given "issue."

You only need to look at the fact that the presidential candidates are only now talking about economic issues to see this. It's much easier to "talk" about Iraq and "speak out" against child molestation than to attack issues for which neither candidate has any good answers.

2008 Jun 30 09:14 AM

[texasgolfer:]

Dennis Prager today said to a guest that no one talks about the ozone hole anymore which was a prior disaster for the world caused by man. Why? Legislation was passed outlawing CFCs so the problem was solved and there is no need to continue discussion regardless of the ozone hole condition. Politicians are only as good as their staffers who do the work and if you have had opportunity to meet many staffers, you understand how weak their knowledge actually is. If their is not money for them attached to any idea theyh have no interest.

2008 Jun 30 05:44 PM

[Jane:]

As long as industry lobbyists outnumber concerned citizens, when it comes to communicating with politicians, we will not see meaningful regulation that holds wrong-doers accountable. Then you have the enormous amount of money these industries contribute to politicians, and it would take a LOT of citiznes speaking up and showing up, to counter that. The rules of how to guard the henhouse always seem to be written by the fox, because consumers/citizens are kept out, or just don't even try to take part. I believe lobbyists and politicians expect apathy from citizens, and usually aren't disappointed. True regulation of any industry would include mandatory prison time for those who break laws, and the threat of never being able to do business again if they repeatedly break rules that don't result in jail time but that do harm the economy and/or consumers. As for consumers' part, they need better education on finances, legal matters, etc, but ultimately the industry is party that's creating the schemes, pushing them, etc. The industry needs to be held accountable. That won't happen if the industry writes the rules and tracks enforcement.

2008 Jun 30 07:16 PM

[Jason Rines...:]

Good comments. I see sometimes you are critisized Mr. Mason because of 'vagueness', 'lack of charts' etc. You are a student of human nature as I am. I appreciate your attempt to educate because the cyclical studies of human nature will always create wealth, where a lack of understanding always creates misunderstanding, loss of wealth and a ton of other things that causes empires to decline (as we now see in the US).

The outcomes of how government reacts is key here. Nazi Germany is an example of the worst reaction in recent history, Britain probably the best. Based on human nature, we are reacting badly and going the Fascism route, with large debates on questioning the Constitution itself.

Citizens will either go along as in Nazi Germany, where the dissenters assets are confiscated and a portion redistributed to the masses for continued cooperation or we will go the French Revolution route. A third option which perhaps is wishful thinking, is that the citizens will use the Internet to find the real truth and simply vote out the same old same old.

But even if this occurs, we are looking at mediocre policies at best (McCain with Dem Congress) or Obama (fascist policy). The herculean effort of an attempt at radical change back to responsibility by our citizens will be closer to 2012.

My personal decision to remain in this country, build a bunker or other extreme ways to protect my family will be considered around that time. Until then, I am preparing other ways to hedge my business and protect those I care for (along with attempting to educate the masses). Keep writing, no one can never tell us we didn't try. But I will remove myself before they begin stoning the prophets, statistical probability tells me it has become too late at that point :)

2008 Jun 30 07:45 PM