Charles Hugh Smith discusses Why a 35% Decline in Housing Values Would Be Good for the Nation. Smith, an otherwise competent commentator, does state the obvious: people have been spending too much on housing and to spend less on that will help households and consequently, the economy in other areas. However he neglects to mention the enormous economic catastrophe that will result from having a huge part of the US National balance sheet permanently wiped out. The US financial sector, as healthy economic agents, cannot survive the permanent impairment of mortgage assets that would result. Bank equity - which forms the basis of banks ability to lend, and even just hold deposits, would be wiped out.
As a matter of fact, it is already wiped out de facto - the FDIC and other regulators just keep banks going in the hopes that a recovery in housing prices will make most of the mortgages legitimate investments again. A further decline to lasting low prices will make that charade simply the legitimisation of a zombie banking system a la Japan.
In a Wall Street Journal editorial on 'walking away' masquerading as an article, the author states:
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.and:
Unfortunately, less money flowing out of the pockets of consumers as debtors means less money flowing into the pockets of citizens as creditors (e.g. the proverbial little old ladies who rely on savings income). It is a bogus calculus which could in any way construe the process as 'healing'.For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
If "shedding debts" means defaulting (as the article seems to imply), then citizens as taxpayers will feel the suck of money coming out of their wallets as Uncle Sam through the FDIC has to make depositors whole. And, as mentioned above, having a walking-dead banking system is not going to help recovery.
On the whole, the intellectual basis of the perspective of this 'article' is entirely flawed. We suspect it is simply another in a long series of efforts by the Ministry of Truth to put a positive spin on the ongoing havoc caused by the Depression.
Not that this flawed intellectual notion doesn't get the support of some heavy guns. Nobel-prize winning Joseph Stiglitz is quoted in Bloomberg as saying a new kind of bankruptcy needs to be created to let mortgage holders write down their mortgage to a market level and keep it! Either Mr. Stiglitz knows better and is dissembling, or he is the one suffering from bankruptcy - intellectual bankruptcy.
There is a serious moral hazard issue here. Dysfunctional economic units must be allowed to suffer the consequences of poor decisions. Stiglitz's proposal is yet another bailout - this time a bailout for credulous, housing-bubble participants on the borrowing side.
We do not approve of bailouts for housing-bubble participants on the lending side, either. But two wrongs do not make a right. The more poor decision-makers are coddled through bailouts, the more society at large is harmed by resources being diverted to the thieving, hapless and stupid; and the less resources are available to be used by the Intelligent who were wise enough not to get involved in the housing bubble, and who are truly the World's only hope of economic progress.
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