Yet Another Piss Poor Idea to Stimulate Housing: Tax Breaks for Rental Units Proposed by Peter Orszag, Vice Chairman at Citigroup Global Banking
It is depressing to see an endless parade of foolish and/or self-serving ideas to "fix" the housing market.
Here is yet another one, this time from Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration.
Please consider the self-serving plea of Peter Orszag posing as Boomberg news: U.S. Can Rent Its Way to a Housing Recovery
No matter what the government might try to do to break the housing-economy cycle, the deleveraging process will still be painful and take some time. But that's not an argument against action; just because a headache can still hurt some even if you take aspirin doesn't mean you should skip the aspirin. One thing the Obama administration could do now -- probably with Republican support -- would be to attack the oversupply of housing stock by allowing a tax write-off for investors who buy empty properties and rent them out.
Plea to Help Citigroup Unload Property
It should not be difficult to read between the lines. This is nothing more than a plea to help Citigroup. I am sick and tired of tax breaks for anything to promote anything, especially self-serving interests of banks.
Seen vs. Unseen
Orszag only looks at the "seen" (alleged help for housing but in reality nothing more than unwarranted help to Citigroup to unload distressed properties)
Government interference in the free market always creates distortions and for that reason alone government ought to get the hell out of the way.
One easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that tax breaks for rental houses would put multi-unit rental property owners at a disadvantage. Many of them are struggling already.
The second easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that multi-family unit construction is on the rise. Orszag's proposal might squash that.
The third easily identifiable "unseen" (except to those like Orszag who really don't give a damn) is that the best thing for housing (but not Citigroup) is for home prices to fall to the point where there is genuine demand.
Actions designed to prevent prices from going where they need to go (just to benefit banks like Citigroup and Bank of America) are the wrong thing to do.
I am quite sure I missed more "unseen" problems as well. Thus I have a far better idea than Orzag's. Let's stop all this government intervention in the free markets and stop all the self-serving bank bailout proposals in disguise at the same time.
Extreme Positions Wrong
At one extreme we have self-serving "help for bank" schemes proposed by Peter Orszag and the bank lobby. At the other extreme we have socialist insanity proposed by the likes of Michael Moore. Both extremes are wrong.
Best Thing to Do is Nothing
The best thing to do is clear: nothing. The free market will solve this on its own accord.
Moreover, were it not for the Fed manipulating interest rates, the SEC giving its blessing to the big three rating agencies, Citigroup and other banks hiding assets off balance sheets in a massive use of leverage, and absurd promotion of the "ownership society" by president Bush, Barney Frank, and nearly everyone in Congress, we would not be in this mess in the first place.
Who Should Bear Consequences for Economic Decisions?
I finished the above post hours ago and just received an email from a reader saying the same thing in a different way. Thomas Doniger of Doniger & Fetter writes ...
Of late, the columnists and bloggers seem to have forgotten that assuming a mortgage or refinancing one's home is a voluntary economic decision. Those who are "underwater" are there as a result of a decision they made. These people did not enter these transactions in reliance on any disposition or securitization of their mortgage and cannot complain they were misled by the same. Why should the taxpayer or society as a whole share the risk these people took? Would the taxpayers or society as a whole have shared in the upside of these investments if the real estate market had continued to rise and the mortgagors sold their properties at a substantial gain? No bail out is appropriate or even fair. Most home mortgagors were not genuinely deceived or the victims of fraud -- they bet on a rising real estate market and lost. That risk, over which society had not control, should not be socialized.
Doniger & Fetter
Los Angeles, CA
Those Who Take Risks Should Face the Consequences (Good or Bad)
A couple of bloggers - including me - have never wavered from the Libertarian stance that the best thing to do is nothing.
Otherwise, Thomas is correct. History proves that government intervention invariably makes matters worse.
Philosophically, morally, and ethically those who take risks should be the ones who pay the price. That applies to Wall Street, to Main Street, to banks, to bondholders, and to homeowners foolishly buying property at inflated prices.
In regards to homeowners, the law provides an exit, actually several exits: Bankruptcy, walking away, and short sales.
However, I repeat my advice: please consult an attorney who specializes in real estate law before taking any action. Laws vary state by state, and mistakes can be extremely costly.
Please see House is Gone but Debt Lives On; Expect Huge Surge in Deficiency Lawsuits for one of the things that can go wrong if you fail to seek proper legal advice.
It has come to my attention that Peter Orszag is as clueless now as he was in 2002 as referenced in Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag.
The expected monetary costs of exposure to GSE insolvency are relatively small -- even given very large levels of outstanding GSE debt and even assuming that the government would bear the cost of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is less than $2 million. To be sure, it is difficult to analyze extremely low-probability events, such as the one embodied in the stress test. Even if the analysis is off by an order of magnitude, however, the expected cost to the government is still very modest.
Peter Orszag is as clueless now as he was then. He and his ilk, together with the Fed are largely responsible for this mess. Why Bloomberg gives the time of day to self-serving buffoons is the real mystery here.