Monday, September 13, 2010

Why more (and faster) foreclosures will help the economy...

A component of Obama's policies has been to keep people from losing their homes to foreclosure. I'm not sure if this is because he thinks there is a political benefit to doing so or if he's motivated by economic considerations or some combination of the two.

Either way, as with most of his economic policies, things would be better (not necessarily for those homeowners, but certainly for the country as a whole) if we went 100% in the other direction.

Why? Yes, that's right, because it would have a net positive impact on consumer and business confidence.

Homeowners facing foreclosure have close to zero confidence (and rightfully so, their lives pretty much suck right now). But even if one could do something to boost their confidence, they don't have any money. They're already spending 100% of what they make. They have no unspent income with which to boost spending (and with it, the economy). Nor do they have any untapped savings or other assets that they can spend. And for the same reason, doing something that makes this group even more negative isn't going to hurt, this group can be counted on to continue to spend 100% of what they make.

Remember, not all groups are considered equal when it comes to stimulating the economy.

One group that counts for more consists of people who aren't spending everything they make. Getting these people to boost their spending will have a positive impact as their spending trickles through the economy (yes, I just did coin the term 'trickle through economics').

And one such group is the people who would like to buy a home. They have lots of money in reserve (or lines of credit to tap). Money they're saving for down payments, and even more money to spend on redecorating and buying the things every homeowner seems to feel they need: a grill, new furniture, housewarming party, etc. Right now, this money is sitting in banks and brokerage accounts. In normal times, there wouldn't be an economic hit, as the banks would have loaned out these funds to other would-be borrowers, but today, with a dearth of borrowers, this money is just sitting in the equivalent of government money market accounts.

But they haven't been buying, in large part because the houses occupied by deadbeats aren't on the market. And the huge number of homes in default clouds the picture for what the true value of a home is. Opening up the foreclosure spigot would eliminate both problems.

Thus, kicking out the deadbeats and selling off the houses would generate a huge boost in spending... and with it, a boost to the economy.

And the jump in spending wouldn't be limited to coming from just those buying houses. Homeowners who aren't behind on their payments have nonetheless been cutting back on their spending and will continue to do so until there's some firmness to housing prices. Eliminating the uncertainty of just where values are will free up some amount of cash currently being held in reserve.

And I don't buy the claims that running houses through foreclosure will have negative effects elsewhere. People who live in neighborhoods with high default rates have already factored that into their thinking, it isn't as if these people are deluding themselves with artificially high house prices. And the same holds for banks, everybody knows bank real estate portfolios aren't worth anywhere near as much as the banks claim. Ironically (and I think I'm using the term properly), increasing the number of foreclosures would boost confidence, as investors would be more comfortable with a lower number that had some substance to it than a higher number they feared was merely the figment of some banker's imagination.

Yes, there would be an emotional hit to those people losing their homes. But that would be offset by the emotional lift to those who were able to buy a home. And given a choice between helping one of two groups, I'd prefer to help the group which can help us all.... by boosting spending and, with it, the economy.

When you think about it, Obama's policies just aren't hurting those with money, they're also hurting the people he thinks he's helping. People in financial trouble need jobs.. and the only way they're going to get jobs is with a growing economy... which isn't going to happen as long as Obama sticks to his policies.