Monday, October 13, 2008

No Quick Fix

No, I did not mean to say that there will be a quick fix to our financial problems. If that were true, the problem would have been fixed long ago.

We are now in the 12th year of "excessive home ownership". This is not a problem that developed over night. The Community Reinvestment Act was passed in 1977. Peak home ownership reached 69% in 2004, peak prices were reached in 2005. We are in our 12th year of above average home ownership but we have had declining home ownership 4 years in a row.

Historically low interest rates support high levels of home ownership. It is not necessary for housing ownership to fall all the way back to 1994 levels. Even today, Fannie Mae buys loans in which little or no down payments were made. Fannie Mae has been instructed to buy at least 40 billion dollars worth of troubled mortgages each year. Fannie was not put out of business but only had its knee caps broken.

Those who cry out in gloom and doom continue to use statistics as blunt instruments. It is commonly reported that household income has been flat for a number of years. This reporting ignores the decline in the size of households. In recent years, young people have purchased their own houses. The young, single, school teacher who owns her own home pulls down the average household income, but the average net disposable income of individuals has gone up, at least until this "crisis" hit.

There is no quick fix but the invisible hand of Adam Smith has been working on this problem for 4 years. Many a young home owner will "tough it out". In the old days, the young apartment renter might run home to Mama during tough times. The young home owner is more likely to find the way to stay put.

Keep in mind that only a few of the gas and heating oil "refund checks" have been cashed. These checks are not like the one time $1,000 Obama checks. These checks will come week after week and their sum will be many times more than $1,000. These checks come with an automatic attitude adjustment too.

To put it another way, many times more people in the world will be helped by lower fuel prices than the number of people hurt by 401-K balance declines. Furthermore, the fuel rebates go in the pock whereas the gains and losses in 401-K accounts is of little short term consequence. Put one more way, the biggest decline in the value of housing has been a paper entry decline. The great bulk of the prior gains or the recent losses has been of no cash flow significance. My house payment is the same this month as it was 10 years ago.

There will be no quick fix but at what point does the fix take hold? Huge amounts of liquidity has been supplied. Paulson has not spent one dime of the $700 Billion Bail Out money but the FOMC has increased the money supply by more. Central bankers around the world have responded in recent days. The fix is in.