All this makes a lot more sense to me than the drivel I’m hearing and reading elsewhere. Does this blog have the smartest readers or what?
This is something I just penned to a friend on the topic of house price corrections and the current government approach. It is long so feel free not to publish:
Housing is going to find its clearing price. It is only a question of over what timeframe the correction will happen. The government, with all its misguided policies on housing, WILL NOT stop the ongoing re-pricing of housing stock. All they will do is cause the process of price adjustment to be prolonged. They are hoping wage inflation will bail them out if they can only keep people “dancing” in their houses long enough to generate said wage inflation. I do not think they will get wage inflation in this environment of negative feedback loops (think rising unemployment). Moreover, the process of creating wage inflation has been made more difficult with the globalization of the labor pool. Finally, I believe the housing market is too big and too diverse for the government to succeed in propping up. The only thing they (policy makers) can do is find ways to slow the process, spreading the adjustment over time.
In any case, I do not think you have to take my word as to the likely success of these policy initiatives: you need only look to Japan. Housing prices (and the stock market and pricing levels in general) have fallen for fifteen years (and counting) after their real estate/credit bubble burst despite their mighty efforts to the contrary. And why did they not succeed, because they endeavored to prop up the economy through government intervention to forestall the self-correcting mechanisms of the markets. The very policies we criticized the Japanese for pursuing, we are, at least at this point, following as well.
In my view, which is obviously not shared by the current policy makers, the best approach is to deal with the pain of the current mess by ripping the band aid off quickly (instead of slowly) and then pick up the pieces, which renewed growth (which will only come when the markets reach equilibrium) will help deal with. Bad debts have to be recognized as such and written off. They only question is who takes the pain: do we privatize profits and socialize losses (our current approach) or let the private sector investors take the losses and then reconstitute the banks afterwards.
There is no hiding from the enormous pain the past sins of easy credit are afflicting on the world’s economies. The sooner we flush out the bad debts/unsustainable behaviors (both public and private) the sooner we can get back on track. Everything else is just slowly pulling off the band aid and will lead to more pain in the long run.