The Death of the Long Boom?
If the 25-year economic boom dies in 2008, I think I will symbolically mark the time of death at exactly 23 minutes and 37 seconds into the Democratic presidential debate last night in Austin. It was at that very moment that Hillary Clinton said she would "freeze interest rates for five years because these adjustable-rate mortgages, if they keep going up, millions of Americans are going to be homeless." And the crowd cheered, and front-runner Barack Obama was silent. See, what that idea would end up doing is raising interest rates on new mortgages—about the last thing the imploding housing market needs right now. (Good luck finding an economist who disagrees with that.)
But it's not just that Clinton offered a funky idea during a heated political campaign. That is a bipartisan malady that comes every four years. (Indeed, some would argue that I should mark the time of death to back when President Bush signed the fiscal stimulus bill.) It's that the crowd ate it up and Obama (who has not supported such a move) let it slide—let slide a proposal for the federal government to massively intervene in the private economy. (If only Uncle Sam had frozen tech stock prices back in 2000.)
So take that little vignette and add to it news that the Bush administration and Congress, as the New York Times put it this morning, "are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses." And what we begin to see is a stunning shift in American economic policy. But the 21st-century Return to Big Government—partly enabled by the housing crisis—could go beyond that. There has been murmuring both in Washington and on Wall Street that perhaps Uncle Sam should take $200 billion or so and just buy up all the subprime mortgages. Or how about a government takeover of troubled banks and monoline insurers, as is happening in the U.K. with troubled Northern Rock?
Here is my point: America's 25-year superboom has been driven by 1) reduced regulation/more competition, 2) lower taxes, and 3) the end of the Cold War, which allowed capitalism to spread across the globe. There is surprisingly little debate about this. (As I have noted before, few economists or politicians on the left or right think we should, say, go back to 70 percent income-tax rates that are unindexed for inflation.)
Yet right now there are calls for 1) a "timeout" from free trade, 2) more industry regulation, 3) high-cost mega-spending projects for the environment, and 4) higher income, investment, and payroll taxes. Basically, a reversal of what has worked that could lead to a long-term economic funk. It is that prospect, rather than a cyclical downturn, that should really worry Main Street and Wall Street. Even if we skirt by a recession and return to growth, that growth could be way below potential.
But credit-crunched Wall Street has yet to focus on all of this, and Main Street may not care, thinking the economy is bulletproof to economic meddling and perhaps wishing for more activist feds when it comes to climate change and education. Or fearing globalization and economic volatility, average folks may vote for economic security over economic opportunity. I have certainly noticed that many of the Obama supporters who leave comments to my blog posts want higher taxes and more government spending and more government control of the economy. If they get their wish, it should make for an interesting economic experiment.
Tags: economy | recession | economic growth
Tools: 
Share
|
| Comments (9)
Reader Comments
Interest Freeze
Hillary wants to freeze interest rates for 5 years. That is terrible news for those of us living on a fixed income who depend on our interest income to live off of. This would help one segment of society at the expense of another, mainly seniors. Home prices were too high as it was, it was time for a correction. Many of those who were caught up in this mess were flippers and speculators trying to profit from rising home prices. Why should the rest of us pay for their greed. Those of us who work hard for our money and don't over-extend ourselves or try to make a quick buck at the expense of others.
Capital gains?
Sara,
I'm not following how you think a lower capital gains tax makes it easier for investors to game the system. Can you explain that, please?
How to play the real estate market ... and never pay taxes!
The lowering of capital gains taxes on owners who occupy their houses for at least a year -- and the near elimination of capital gains for those who stay two years or more -- has clearly encouraged the sort of trade-up mentality that helped fuel speculation in the housing market in the early years of the Bush administration. (In all fairness, the elimination of capital gains on two-year home ownership was enacted under Clinton, in 1997, while the lowering of the capital gains tax rate for property owned less than two years was George W. Bush's doing.)
Meanwhile, the recent liberalization of the so-called "1031 exchange" rule has essentially eliminated taxes for investors who want to trade one property for another, again fueling the flipping of properties.
There were, of course, many other factors that fueled real estate speculation -- unnaturally low interest rates, exotic mortgages, lax underwriting standards, etc. -- but lower capital gains taxes clearly reduced homeowners' incentive to stay put and increased the temptation to trade-up and flip properties. (If you want proof, check out this story from 2000: Making Home Sale Capital Gains Disappear - http://www.fool.com/taxes/2000/taxes000428.htm)
Of course, the utter lack of government oversight of the mortgage industry probably did more to screw things up than any of the stuff I've mentioned above. The Fed, in particular, stood by while Bush trumpted the virtues of home ownership -- even though it was clear early on that many, many people where getting into homes they wouldn't be able to afford over the long run.
The 1990s 'greed is good' mantra that began in Wall Street's financial firms echoed along Main Street's real estate offices in the 2000s.
In both cases, it ended badly for the average American.
long boom
If there is one tax where supply-side really shows its stuff it is with cap gains. Cut the cap gains rate and cap gains revenue goes up thanks to increased economic activity/higher asset prices ... I mean, the smartest budget cutting move Clinton made was cutting cap gains in 1997 which led to a flood of revenue ...
long boom
If you think a 20% decline in home values will not put this economy in a recession or possibly a depression you are a fool. The government needs to put in effect a 1 to 2 year program to stem the tide of foreclosures for people in primary residences. Something similar to the S&L bailout and Chrysler bailout. You were obviously in diapers when we had our last serious economic crisis.
housing markets
Why is increasing taxes always the response? Someone explain why it is a good idea to take money from me and give it to you, after some drolt in DC gets a share of it.
How is another govt program going to make people smarter about buying a house?
A fool and his money are always separated. An ARM is never a good idea, when the boy from Wall Street(master of the universe, now begging for a bailout) gets to do the adjusting.
Government is the problem
The government created the housing bubble by pumping too much credit into the economy which caused artifically low interest rates which in turn encouraged people to buy homes they couldn't afford or to speculate in the housing market. A recession may come now, but that would probably be a good thing at this point. The economy needs to slough off all the malinvestments. Once the purge is complete and the economy is back on solid ground it can begin moving forward again. However, we need to learn from this massive government error and take away the government's power to cause such an error. The Federal Reserve needs to go; no more endless inflationary printing of money to create artifically low interest rates. Peg money to durable goods and commodities (or at least have a policy of 0% inflation where the money supply is controled so that it increases at a 1:1 ratio against economic growth in goods and services). Do away with Fanny Mae and other government lending institutions that promote home ownership (malinvestment). Massive across the board spending cuts and tax cuts; kick that economic activity back to the people. These are the sorts of things that we need, not more big government which has failed, yet again, as it always does.
"There were, of course, many other factors that fueled real estate speculation -- unnaturally low interest rates, exotic mortgages, lax underwriting standards, etc. -- but lower capital gains taxes clearly reduced homeowners' incentive to stay put and increased the temptation to trade-up and flip properties."
Sara, you don't know wha tyou're talking about. If regular homeowners were flipping their houses to take advantage of capital gains tax advantages, they deserve the predicament they are in. Besides, if a homeowner sells his home within the first two years of ownership, the sell is not treated as a capital gains tax deduction, but as ordinary income. Also, two other restrictions, according to your own article: 1) you have to use the home as your primary residence and 2) you can't sell more than one home in the two year period. Any of those happen and its kaput to your capital gains deduction.
But let's say for instance that you are correct in your analysis. How is this exactly a bad thing for the end consumer? The consumer can purchase a home, sell it within the two year period, get another home, and repeat, making all of that money tax free. Isn't this what you want for the middle income folk, to be able to make money at a lower rate than the rich folks? Of course not, because Bush mucked up the entire system.
"Something similar to the S&L bailout and Chrysler bailout."
Yes, Steve, this is exactly what the industry needs. It seems there's a recurring theme here. If the government continuously bails out industry, industry won't learn its lesson and continue to engage in risky behavior. It seems the economists have a term for this type of behavior. Oh, yeah, it's called moral hazard. I may have been in diapers at the time when both were bailed out, but I know enough about economics and economic history to know that behavior won't change if the government continuously comes to the rescue of errant financial behavior.
Add your thoughts
Your comment will be posted immediately, unless it is spam or contains profanity. For more information, please see our comment guidelines.advertisement
You are naive, ignorant or both ...
... if you take the promises made at political debates like last night's as gospel.
(Countless U.S. President have reneged on such promises, most recently your pal George W. Bush, who "campaigned as a 'compassionate conservative' in domestic policy and an opponent of any sustained American role as global policeman. But his domestic policies have been designed to appeal to the right-wing base of the Republican Party, and his response to 9/11 has made the United States a preemptive, unilateral world power with boundless global ambitions and responsibilities," Joseph Ellis recently wrote in a story about broken campaign promises in the LA Times - www.latimes.com/news/printedition/opinion/la-oe-ellis2jan02,0,5877)
More likely, you are simply engaging in the same sort of 'tax and spend' spin as all the rest of your right wing cronies. (So much for 'fair and balanced' journalism at U.S. News.)
Your 'less government, lower taxes' explanation for the nation's economic success is equally simplistic. We are in the current economic mess precisely because 'less government' regulation of the mortgage and home building industries -- as well as lower capital gains taxes and dodges like the "1031 exchange" that encouraged the flipping of investor-owned property -- allowed greedy people to do what they do best: game the system until it breaks.
Feb 22, 2008 16:12:50 PM [permalink] [report comment]