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14 years ago

Rich, you express very well
Rich, you express very well what I, and likely many readers, feel is the current situation. Do you have any thoughts on what the limits are to the government intervention?

My own uneducated view is that the govt distortion in house prices is limited only by the inflation that will result. So the sequence is:

1. Pour ever-larger amounts of govt money into housing (probably into the multi-trillions), until prices stabilize well above their free market levels

2. Govt borrows much more to fund the housing market intervention. Keep offering loans with low initial payments and fixed interest rates to home buyers

3. After a while, foreigner appetite for US sovereign borrowing is sated and interest rates begin to rise

4. Print money to substitute for borrowing from foreigners

5. Inflation gets going in earnest

6. Borrowers who borrowed with low initial payments and fixed interest rates win, because all their debt payments shrink in real terms. Savers/debtholders lose.

7. As nominal house prices start to go up of their own accord because of inflation, start to remove the most extreme govt mechanisms that distorted the market

8. Begin to combat inflation, but not so vigorously that it is killed quickly. Gear up slowly. After ten or so years, it finally subsides, but now most prices are double their prior levels, except for house prices.

9. [Warning, political cynicism here] A new steady state is reached, and 2020 is rung in, with celebrations that govt has bravely and skillfully fought and won 2 economic wars sprung on it by the vicious markets – against asset price deflation first, and against consumer price inflation next. Political leaders who put on the grand play are hailed by the populace, who don’t understand both sides of the war were carefully managed all along.

14 years ago
Reply to  patientrenter

I agree with your analysis of
I agree with your analysis of what the gov’t is trying to do in the 9 step, 12 year plan above… 🙂

But could the plan fall apart? Is it possible that somewhere during steps 3,4,5 people lose faith in US gov’t treasuries or even worse US gov’t defaults on it’s debt?

14 years ago

Great article! It will be
Great article! It will be interesting to see what effect the government’s plan will have. I’m somewhat concerned this is just delaying the inevitable.

Recently, I’ve noticed that there is a new house price index that comes out before Case-Shiller’s and reports on a national and county level. This new index, IAS360 HPI was created by Integrated Asset Services who deal with default management and residential collateral valuation. It’s interesting to see in their data for August, that house prices are continuing to see declines in all three regions except for the Northeast… I’m convinced that this is truly the index to keep your eyes on if you’re trying to get a glimpse of recovery…Has anyone else been following this?