As discussed in a recent Bloomberg piece, several U.S. senators from both parties are pushing to almost double the recently enacted $8,000 tax credit for first-time homebuyers to $15,000. The same senators are also pushing to remove the current income restrictions — $75,000 for individuals and $150,000 for couples — while also removing the first-time buyer requirement.
The intent of the increase, and the original credit, is to increase the demand for housing and to create a “bottom” to the housing market. The flaw of this approach is that it creates a false bottom, one characterized by government-inflated prices and not fundamentals. It was excessive government subsidies into housing that helped create the housing bubble, additional subsidies to re-inflate the bubble will only prolong the actual market adjustment.
If it were only a matter of prolonging the adjustment, then the huge cost of the tax credit might be easier to justify. Yet by encouraging increased housing production, the tax credit will increase supply when we already have a huge glut of housing. Despite housing starts being near 50-year lows, there is still too much construction going on. The way to spur demand in housing is the same way you spur demand in any market: you cut prices.
Removing the income limits makes clear the real intention of the tax credit, to help the wealthiest households. About three-fourths of existing families already fall under the income cap of $75,000. As we move up the income latter, home equity makes up a smaller percentage of one’s total wealth. The richest families can make do with a decline in their housing wealth and continue spending; they have other substantial sources of wealth. If we have learned anything from the housing boom and bust, it should be that continued government efforts to rearrange the housing market have been costly failures.
The administration's presumption that America can borrow its way to prosperity has taken a couple of big hits over the last couple days.
First, just as the Third World debt crisis destroyed the belief among international bankers that countries don't go bankrupt, so is the West's borrowing binge ending the belief among international investors that the U.S. and other Western nations are safe economic bets.
Reports the Wall Street Journal:
Britain was warned by Standard & Poor's Ratings Service that it may lose its coveted triple-A credit rating, triggering a drop in U.K. bonds and sparking global fears about the consequences of massive debts being incurred by the U.S. and other major nations as they try to dig out from the economic crisis.
The announcement quickly sent waves across the Atlantic. Investors initially dumped U.K. bonds and the pound, heading for the relative safety of U.S. Treasurys. But within hours, worries about an onslaught of new U.S. bond sales and the security of America's own triple-A rating drove down the prices of U.S. Treasurys.
The yield of the benchmark U.S. 10-year bond, which moves in the opposite direction to the price, rose by 0.15 percentage point from Wednesday to 3.355%, its highest level in six months.
The relative gloom about the U.K. and the U.S. was apparent Thursday in the market for credit-default swaps, where investors can buy and sell insurance against sovereign defaults. Five years of insurance on $10 million in U.K. debt jumped to around $81,000 a year, from $72,000 earlier in the day. U.S. debt insurance cost the equivalent of $37,500 — in the same range as France at $38,000, and Germany at $35,000.
A shot across the bow of the American ship of state, some analysts have called it.
But shots also were being fired from another direction: East Asia. The Chinese are starting to have doubts about Uncle Sam's creditworthiness. Reports the New York Times:
Leaders in both Washington and Beijing have been fretting openly about the mutual dependence — some would say codependence — created by China’s vast holdings of United States bonds. But beyond the talk, the relationship is already changing with surprising speed.
China is growing more picky about which American debt it is willing to finance, and is changing laws to make it easier for Chinese companies to invest abroad the billions of dollars they take in each year by exporting to America. For its part, the United States is becoming relatively less dependent on Chinese financing.
Financial statistics released by both countries in recent days show that China paradoxically stepped up its lending to the American government over the winter even as it virtually stopped putting fresh money into dollars.
This combination is possible because China has been exchanging one dollar-denominated asset for another — selling the debt of government-sponsored enterprises like Fannie Mae and Freddie Mac in a hurry to buy Treasuries. While this has been clear for months, new data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt.
The national debt is over $11 trillion. This year's deficit will run nearly $2 trillion. Next year the deficit is projected to be $1.2 trillion, but it undoubtedly will run more. The administration projects an extra $10 trillion in red ink over the coming decade.
Fannie Mae and Freddie Mac need more money. The Pension Benefit Guaranty Corporation is in trouble. The FDIC will need more cash to clean up failed banks. The effectively nationalized auto companies will soak up more funds. Then there's the more than $70 trillion in unfunded Social Security and Medicare liabilities.
But don't worry, be happy!
The USA Today editorializes this morning in support of the DC voucher program and school choice in general. That’s a shift from last year when Robert Enlow of the Friedman Foundation had to respond to their dismissal of vouchers. From the enlightened board:
As an Education Department spokesman says, "The unions are not happy." But 20 million low-income school kids need a chance to succeed. School choice is the most effective way to give it to them.
The shift of center-left elite opinion on school choice is a hugely important development, as I noted with the first wave of mainstream media attention to the DC voucher program’s death-sentence:
When elites unite on mainstream issues, the public's response is relatively nonideological and lopsided. School choice is progressively mainstreaming, slowly but surely moving from a polarized elite debate to one where the intensity and support is weighted in favor of school choice.
When an issue that used to be considered free-market fringe is embraced as a moral litmus test for politicians by liberal editorial boards, the issue-argument has been won. That's certainly not to say the policy war has been won, but an important battle toward realizing that goal has been.
The opposition's intensity and moral certitude is bleeding out one program at a time. School choice is no longer an abstract proposition; faces and lives are attached to the 24 private school-choice programs in 14 states and the District of Columbia. In the past four years, four education tax-credit programs have passed that serve at least low-income children. . .
School-choice opponents might have won the battle over vouchers in the District, but they are losing the larger war. They have inadvertently revealed what's truly at stake; not funding issues or public school ideology, but our promise to all children of a fair shot at success in life.
Choice opponents are on the wrong side of right and the wrong side of history.
One of the best laugh lines always has been "I'm from the government and I'm here to help you." Certainly that's true when it comes to consumer protection.
In the name of saving customers from the evil, rapacious credit card companies Congress plans on limiting access to credit. It also is working to hike costs for people with good credit.
Reports the New York Times:
Now Congress is moving to limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry. And to make up for lost income, the card companies are going after those people with sterling credit.
Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups.
“It will be a different business,” said Edward L. Yingling, the chief executive of the American Bankers Association, which has been lobbying Congress for more lenient legislation on behalf of the nation’s biggest banks. “Those that manage their credit well will in some degree subsidize those that have credit problems.”
This makes a lot of sense. We're worried about bad debt, bad mortgages, and bad loans. So Congress is going to penalize people with good credit who carefully manage their financial affairs. Of course!
It has long been evident that Congress has the reverse Midas touch. Everything congressmen touch turns to, well, this is a family-oriented blog. You can fill in the blank.
If Congress wants to help consumers, the best thing it could do is take an extended recess.