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by petra
2617 days ago
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>>It did what it was intended to do, which was to shore up housing prices and prevent mass defaults. So to prevent cheap housing in order to save the banks and prevent a depression ? Isn't cheap housing an amazing thing, an historical opportunity to reduce poverty etc ? And if so, doesn't it worth some sacrifice ? |
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Not even just the banks -- all the dumb entities that had been holding toxic mortgaged-backed securities. This was everything from insurance companies (who then wouldn't have been able to pay claims) to pension funds.
> Isn't cheap housing an amazing thing, an historical opportunity to reduce poverty etc ?
It is -- that's the problem. Right now you have millions of people who have overpaid for a home. They paid $400K for something that should have cost $200K, and then over the past decade have paid more than $200K in just down payment and monthly payments, but still owe more than $200K of principal.
If you just reset housing prices and do nothing else, all of those people are wiped out -- they still owe more than their house is worth even though they've already paid enough that they should own it outright by now. Moreover, they would end up underwater and have no reason not to default, with all the downstream consequences of that.
The nominal cost they're paying for housing is already sunk -- it was set at the time they bought the house. The only way to reduce it for all of those people is for the real cost of housing to decline without changing the nominal cost.
In other words, there needs to be inflation, so that nominal housing prices stay where they are and people don't end up underwater, but wages and everything else rise to catch up to them. And then people can pay back their existing mortgage more easily.
That's what QE was intended to do, but it only did half the job. It kept nominal housing prices up but it didn't result in wage growth because the money went into the housing and bond markets rather than into the pockets of regular people, and that in turn drove investors from the bond market into the stock market. So now we've got a housing bubble and a stock bubble. Whee.
And again, the way to deflate either of them without a big depression-inducing pop is to let their nominal prices stay where they are while adopting policies to raise nominal wages and the nominal prices of everything else back to parity.