No Sweat Economics

The January Case-Shiller home price index fell 19% from year-ago levels.  This is the largest drop in home prices in the nine-year history of the 20-city index.  And it’s really good news.

Yes, it’s good news for anyone shopping for a home,  but that’s not what I mean.  As a result of the spike in foreclosures and massive overbuilding over the past several years (people always try to take advantage of strong real estate markets by building more), the supply of homes far exceeds the demand.  Many talking heads have said the oversupply ensures a weak housing market for years to come.  This is absolute nonsense, and demonstrates a lack of understanding of basic economics.

Supply exceeds demand AT CURRENT PRICES.  The free market system has an easy cure for that:  the pricing mechanism.  Once prices drop enough, many more people will  be in the market to buy.  Some will be families who can suddenly afford homes.  Others will be investors who buy homes for rental.  And still others will be  speculators looking to buy on the cheap and sell years later for a profit.

But if the government gets involved and tries to prevent home prices from falling, the pricing mechanism won’t work.  There is political pressure to limit foreclosures.  But many people are losing “their” homes because they couldn’t afford them to begin with.  Remember:  the jump in foreclosures began well before the economy turned down and unemployment began to climb appreciably.  If you haven’t lost your job (or suffered some other financial calamity), there’s no reason you should be defaulting on your mortgage…unless of course you couldn’t afford it.

Allow the pricing mechanism to operate and homes will eventually be in the hands of people who can afford them.  This 19% decline is very good news, but it’s likely we’ll need further drops before supply and demand are more balanced.  The best we can hope for now is bickering among politicians so they don’t do anything to “help” the situation.  Any actions that prevent prices from reaching their natural levels could kill the housing market for years.

On the surface, the White House strong-arming of GM and Chrysler towards possible bankruptcy filings might seem like just what the doctor ordered. Without the crippling liability of UAW contracts, German, Japanese, and Korean automakers produce cars far more efficiently than the Big 3. And they do it on American soil with happy American workers. A bankruptcy court has the power to void the contracts.

If the government hadn’t interfered to begin with, GM and Chrysler would have had two options: negotiate givebacks with unions and creditors, or declare bankruptcy. So taxpayer bailout money bought them a few months of business as usual. And we picked up the tab.

Once again, GM and Chrysler have the same two options. Except now they also have to negotiate with the US government. This group possesses a combination of power and incompetence that no private entity could hope to match. Whatever you think of departed GM chief Rick Wagoner, it’s frightening that he was forced out by the President of the US. And frankly, it’s not even relevant that this president has never worked in the private sector, met a payroll, or managed any organization of size in his life. I am always amazed by the arrogance of politicians and bureaucrats who have never demonstrated any business acumen presuming to impose their views on corporate decision makers.

There is an upside to this situation as well as the AIG bonus fiasco: you can bet that in the future executives will think long and hard before going into business with the government. As partners they’ve proven to be about as silent as Tony Soprano…and without the charm.

I just heard Bill O’Reilly say George Soros “ruined the British Pound.” I assume O’Reilly is talking about the early 1990s, not the recent Pound implosion. I’m no fan of Soros, but that assertion is ridiculous. Over the years Boy George has taken short positions in a number of currencies he believed were way too high. That’s his job as a hedge fund manager: buy what’s cheap, and sell what’s expensive. He’s got a very good batting average, which is why he’s a billionaire.

Currencies don’t collapse because of Soros and his speculation. That happens because eventually the market recognizes the problems Soros saw months or years earlier. Soros and others like him are handy scapegoats for politicians whose irresponsible taxation and spending policies really “ruined” their currencies.

O’Reilly obviously despises Soros for his left wing political activities. Mr. Bill is great when he goes after lying politicians and judges who go easy on child molesters. But when he talks economics I want to scream at the TV!

Jake DeSantis does a terrific job cutting through the demagoguery and wealth envy surrounding the AIG bonus mess.  It amounts to a moral defense of capitalism, justifying the “excessive” compensation of competent people.  The company’s owners (mainly U.S. taxpayers) will miss him.