divOn Friday's All Things Considered, New York Times columnist David Brooks was dismissive of Rick Santelli's now-celebrated rant against President Obama's housing bailout. Brookes conceded that there was a "fundamental unjustice [sic]" associated with the bailout, but...
We're not just individuals; we have a system, a system we all share. And the system right now is so unsteady that we have no individual responsibility in our own system because the economy is so unsteady. If you deserve a job sometimes you get laid off, if you don't deserve, sometimes you don't get laid off. And the government's fundamental responsibility right now is to make sure the system is stable. And that may reward people who took unnecessary risks but we just have to live with that. The primary responsibility here is not to worry about the moral hazard; it's to keep the stability of the system as a whole intact. And I think that the housing plan is a pretty moderate and respectable way to go about that.
If you can figure out what the heck Brooks is saying here, my hat's off to you. As best as I can tell, Brooks is arguing that the economy is in free fall and the only way to arrest the collapse is to stop the foreclosures. If that means bailing out the irresponsible, then bail them out we must. At least, I think that's what he's saying.
But do foreclosures equal macroeconomic collapse? It's not obvious that they do. Foreclosures should only bother the unforeclosed if they reduce the value of their homes. Do they? Empirical investigation suggests that the impact of foreclosures on unforeclosed housing values is quite small. It's vacant homes that (sometimes) drive down the value of neighboring inhabited homes. But if foreclosures are quickly followed by sales to new owners, that problem does not arise. And even if it takes a while for the empty houses to sell, the impact on neighborhood housing value is temporary. That is, as long as you're not trying to sell when all the for-sale signs are littering the neighborhood, you'll be OK. Hence, the problem here is excess housing stock — empty houses that can't find buyers — not foreclosures per se.
Will Obama's plan reduce the excess housing stock? It's hard to see how. Foreclosures have been most heavily concentrated in places where housing supply is elastic and prices remain well above construction costs. As long as that is the case, new construction will go on — and has gone on — even in the teeth of the ongoing house price collapse.
But maybe Brooks isn't really worried about foreclosures. Maybe he's worried about the decline in housing prices and the related collapse of securities built on existing mortgages. Maybe he's arguing that propping-up — or at the very least, stabilizing — housing prices is the only way to rescue the trillions of dollars worth of assets tied to the housing market and, thus, to rescue the economy as a whole. If so, then good luck. Harvard economist Edward Glaeser makes a very strong argument that nothing the feds can do will keep housing prices at the inflated levels reached over the last decade. And even were such a thing possible, Glaeser argues it would be economically counterproductive:
Artificially boosting prices will distort construction decisions and redistribute wealth from buyers to sellers. Moreover, most schemes seem unlikely to significantly raise prices, especially in the elastic areas that have seen the largest reductions in prices. Against these uncertain benefits, the costs of many of the schemes seem quite large. Using hundreds of billions of dollars to buy or refinance mortgages represents a large transfer from taxpayers to current homeowners... Moreover, a large-scale intervention that makes the government a vast lender is likely to create permanent institutions that impose large future costs on taxpayers. Recent events at Fannie Mae and Freddie Mac certainly suggest the difficulties that result when government-sponsored enterprises play mortgage lender to the nation.
Nor is Glaeser sympathetic with the political rush to save those threatened with foreclosure:
As foreclosure becomes more difficult, the value of mortgages declines, which reduces the value of banks assets. Direct aid to distressed homeowners may be less problematic, but it isn’t clear that the government can or should be trying to keep people in homes they can’t afford at any reasonable interest rate. In most cases, a small amount of aid to help in moving would be a more sensible, and cost effective, response to foreclosures. We do need action to fix our banking system, but those actions should be targeted towards the banking system itself, not towards the housing market.
While public intellectuals like Brooks are — for the moment anyway — inclined to lecture the Rick Santellis of this world about the necessity of housing bailouts for the greater good, there is far less substance to that lecture than one might think.