Where are We Going After the Housing Collapse?

We are currently going through a precarious financial time due, I would argue, to excess credit.   The decline in the housing market and the subprime fiasco are just the most visible signs of the difficulties that are currently occupying the attention of investors and policy makers. 

Home ownership is part of the "American Dream" and the reckless lending practices of the last decade have enabled many who otherwise would not be able to purchase a home to do so.  Now the bill is due, and the payment cannot be made.  Bankruptcy and foreclosures are expected.  But in an election year, politicians are falling over one another to find a quick and almost painless fix to the problem. 

Perhaps these words from F. A. Hayek concerning a different context will give us reason to think twice.  In a 1982 interview in response to a question concerning the US recession Hayek said:

What I can say about the United States is exactly the same that I've been preaching in England since Mrs. Thatcher has been in power. It is politically possible to cause, by braking inflation, 20% unemployment for six months. It is not politically possible to create 10% unemployment for three years. If you do it quickly even a very high rate of unemployment can be tolerated. If you try to do it slowly and gently, you are bound to fail, because people in the long run will not put up with it. But they will accept it if it comes quickly.

I think every termination of inflation, which is without doubt the most important thing to do, has to be done much more quickly than it has been done in England. It wasn't Mrs. Thatcher's fault; she knew she couldn't get her cabinet to follow her view. She admits as much. In fact, I heard her say, "My one mistake was to go on much too slowly. I ought to have done it much more quickly." I think the same thing is in a measure true of the United States. You have done much better. You have, since Reagan came into power, reduced inflation very considerably. But one thing I might add is that reducing inflation is of little use unless you bring it down to zero inflation. Anybody who argues that a little inflation is all right, is completely wrong because inflation stimulates things only as it accelerates. If you rely on a little inflation, you are bound to increase it. You are driven into increasing inflation. So the aim must be not to reduce inflation, but as rapidly as possible to get back to a stable price level.

Comments

[marianne]

I believe that subprime lending is a lot like Jessica Rabbit...not bad, just drawn that way. There are companies, like Ocean Capital in Rhode Island, that make financing available for sole proprietor businesses that would not be able to secure financing in the traditional marketplace. We've all got to start somewhere and oftentimes a stated income loan is the only means to start one's business.

[Nick]

Pete,
Interesting post. Where can I find a print copy of that interview? Thanks, Nick

[Peter Boettke]

CATO Policy Report, sorry I didn't list it to begin with. Hayek did the interview in 1982, but the CATO Policy Report was published in 1983.

[John]

I was at economist's view and read a piece on the pending recession: cuts taxes. It's titled :"Robert Reich: The Way to Prevent the Looming Recession"

I left an answer (poorly written...I was in a hurry) but left a better answer under "ZTN" at Reich's blog.

I thought his strange Keynesian view of how to AVOID the recession was worthy of a real Austrian comment...not my layman's attempt.

I'd love to hear your take on the matter, Dr. Boettke.

[John]

ALSO,

a poster named Anne at Economists View responded to me, sensed my perspective and called it "Austrian Nonsense".

I've yet to see a sound explanation on how or why the ATOTBC is nonsense. Attempts that I've read always seem to misinterpret it when they do.

[Nick]

Pete - great. Thanks a lot.

[Steven Horwitz]

There's a housing collapse? ;)

Seriously, I think the housing issues are being overblown because most of the media folks live in the areas where prices got bid up the most, hence are tending to fall the most. Out in the "rest of the country," prices never flew up so they aren't going down.

That imbalance itself could well be an injection effect, but if so, it hardly portends some sort of system-wide collapse.

[Justin Rietz]

I beg to differ with Professor Horowitz, assuming by "rest of the country" he generally means the U.S. less the major metro areas.

I was recently in a mid-size city (about 20,000 people) about an hour drive from Minneapolis - definitely not a suburb. I spoke with a local real estate attorney about the pace of business, and he said that the real estate market had dried up, though foreclosure activity was significantly increasing. Several local real estate agents and mortgage brokers confirmed this view. It didn't appear much different than what I am witnessing in Silicon Valley (though central California is where the real crises is occuring at the moment).

On a similar note, I would be interested to hear viewpoints on why the subprime crises is occuring (assuming it is). It appears to me that banks took on excessive risk by offering loans to people with poor or no credit. Measuring someone's credit worthiness should be independent of the market interest rate, so I am having a difficult time identifying the ABCT cause - effect relationship.

[John]

Once homeowners start missing payments on the old house, the foreclosure process will start (especially if they planning on letting it go into foreclosure and are doing nothing to gain foreclosure advice or seek out options to save their home). The bank will sell the house at a sheriff sale, and the new owners will be able to evict the foreclosure victims and anything that is left in the old house. Purchasing a new house after this process has begun will be impossible due to the foreclosure status of the old house and the negative effect on one's credit after several mortgage payments go unpaid.
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