Thursday, September 18, 2008

It's Not A Housing Problem, It's A Leverage Problem: Let's Bring Back 20% Down Payments

In this Bloomberg interview, economist and former St. Louis Fed president William Poole says that the fundamental problem is not housing, but leverage, both for individual, highly-leveraged households who had too little equity in their homes, and for the highly-leveraged financial firms that purchased the highly-leveraged mortgage securities.

Poole says there's too much debt, too much leverage, not enough equity in general, and suggests phasing out (or reducing by 50%) the tax deductibility of interest payments for corporations, which encourages excessive debt for tax reasons.

Arnold Kling at EconLog agrees with Poole, and suggests that "If we go back to 20% down payments, the market will be more stable. I'm sure that in a free market we would see 20% down payments. Barney Frank is the only person I can think of who still wants to lend with little or no money down. He's welcome to do it, but I dare him to use his own money instead of ours."

6 Comments:

At 9/19/2008 10:17 AM, Blogger randian said...

Corporations don't incur debt merely for tax reasons. It's also about not giving up ownership. Besides, the SEC's rules on private offerings are ridiculous at best, if small companies can't deduct interest they often won't be formed if they have to give up big chunks of equity to outside investors, assuming the entrepreneur can navigate the byzantine and expensive private offering rules. Raising equity is comparatively easy if you're already public, like Regulation D a limit on interest deductions serves to further privilege public corporations at the expense of private ones.

 
At 9/19/2008 2:03 PM, Anonymous Anonymous said...

Geez, Carpe Diem, Poole had to tell you.
You being of the persuasion for well over a year that subprime debt was contained to those non-caucasians inhabiting the other side of the Community Reinvestment track.

Required downpayments of 20% will destroy the housing market for caucasians in all metropolitan markets, as if the overvaluations dependent on fraudulent leverage didn't destroy it in the first place. Nothing like kicking the cur when it is already down.

Per capita (GAAP) debt of $549,000.00.

Another example of myopic Friedmanite's inability to see beyond their nostrils.

 
At 9/19/2008 2:55 PM, Blogger randian said...

A Friedmanite wouldn't have incurred that government debt in the first place, nor would he have passed CRA or bailed out any Wall Street firm no matter how much they whined.

 
At 9/19/2008 9:35 PM, Anonymous qT said...

These problems are very complex. Why do we continue to look for someone to blame?

Isn't it more important to determine how to address the present problems and determine the public policies to ensure that systemic failures do not happen going forward?

It's like deciding that the electrical grid should be blamed and villified due to the damage of Hurricane Ike. Hurricanes happen and damage occurs. The more pressing question is how to get the grid up and running.

Isn't it time we stopped blaming deregulation, CEOs, investment bankers, homeowners, Democrats, GOP, Adam Smith, etc. and got on with solving the problem?

 
At 9/19/2008 10:16 PM, Anonymous Anonymous said...

Hey Mark I thought the Subprime issue was a non-issue. What happened to the Goldilocks economy?

 
At 9/20/2008 5:30 AM, Blogger juandos said...

Well as usual anon @ 2:03 PM gets it wrong again: "Per capita (GAAP) debt of $549,000.00"...

The very same Hodges page shows us that the massive debt incurred by each citizen is due to entitlements some liberals seem to think is necessary...

Thomas Sowell: The 'working poor' scam pushes an agenda of more entitlements

Taxpayers' bill leaps by trillions

The Trillion-Dollar Bank Shakedown That Bodes Ill for Cities

 

Post a Comment

<< Home