Republicans and Housing
I must be channeling the editorial staff at the Wall Street Journal. We must have both heard the same NPR show this Thursday morning. In this article they discuss the recent idea to limit mortgage rates to 4%.
They point to some of the problems with this proposal, but there are other problems with the government trying to qualify borrowers. The manipulation of lending standards at Freddie Mae and Fannie Mac for the purpose of trying to expand the ranks of home ownership are what got us into the mess in the first place. However, imagine if the government errs on the other conservative side of the credit markets (which is exactly what the federal regulators are doing to commercial banking right now). While interest rates may be 4%, very few people will be able to qualify, and the credit markets will remain frozen.
The Great Depression did not result from the Crash of ’29, but rather the regulatory and monetary practices that followed in response. Price fixing and regulatory limitation of market are what produced 25% unemployment.
The recent economy was highly leveraged, which resulted in asset inflation. The over-leverage resulted from lots of reasons, not the least of which was poor regulation rather than the absence of regulation. The process of de-leveraging the economy will cause asset deflation and economic dislocation, but it does not necessarily have to cause extensive price deflation for other goods and services. Bad regulation, bad fiscal policy, and bad monetary policy will give us the exact problem they are trying to solve.
