Torture versus collateral damage; the bigger evil?

[motorfirebox]

Are housing prices bubbling again? Maybe in Phoenix, but surely not in Detroit or Chicago.

Actually...

Home prices rising is not a bad thing, but it's not an indicator of economic health for those who aren't already well off. Renting a home is an economic burden, not an investment; home prices rising while median wages fall is how you continue to widen the already-growing wealth gap. The trickle of construction jobs derived from private equity scooping up these devalued homes doesn't go any significant distance towards reversing that.

None of that exists in a vacuum though. It is, after all, government policy to maintain very low interest rates to boost borrowing and there are many policies specifically designed to boost the housing sector.

Sure. But a high-risk mortgage in default is just a high-risk mortgage in default. It only becomes an economy-wrecking problem when the finance industry and the ratings agencies conspire to fraudulently make that high-risk mortgage appear low-risk, thereby attracting significant investment.

Stuff

I'm not arguing that government oversight is a magic tonic that will always fix everything. I'm arguing against the idea that private investment is a magic tonic that will always fix everything.

[Dayuhan]

Actually...

Detroit's housing market may have shown a bounce but the base of the bounce was desperately low, and it's still a deeply distressed market that's not even conceivably near a bubble. What you're seeing there is less a matter of "home prices rising" than the removal of many the ultra-discounted foreclosure properties from the market. Removing that low-end bulge raises the average and makes the numbers look better, but it doesn't make that market healthy.

Home prices rising is not a bad thing, but it's not an indicator of economic health for those who aren't already well off. Renting a home is an economic burden, not an investment; home prices rising while median wages fall is how you continue to widen the already-growing wealth gap. The trickle of construction jobs derived from private equity scooping up these devalued homes doesn't go any significant distance towards reversing that.

Would you have the government tell private equity that houses shouldn't be bought until median wages rise (not likely for a long time, what with the baby boom generation passing the earnings peak and approaching retirement)? How would it help to have those potentially rentable homes sitting around vacant and deteriorating?

I'm not arguing that government oversight is a magic tonic that will always fix everything. I'm arguing against the idea that private investment is a magic tonic that will always fix everything.

Private investment is not a magic tonic, but it's a prerequisite to fixing anything. Government "oversight" is as likely to harm as to help. Government certainly played a role in the last recession, but it wasn't for lack of oversight, it was in the provision of perverse incentives. Intervening to flatten out the 2000/2001 recession, which should have been much deeper given the dimensions of the bubble preceding it, and most particularly intervening to prevent derivatives markets from failing (as they should have in 2001) effectively removed the perception of risk from the financial equation. Keeping interest rates way too low for way too long in an environment where the perception of risk was missing effectively guaranteed excessive speculation. The idea that you can create perverse incentives on that scale and then control the destructive effects with government oversight is an illusion. It can't be done. No amount of regulation or oversight will compensate for bad management of macro incentives. It's easy in retrospect to say that this or that gap could have been plugged, but another would have been found. Once the perverse incentive is in place the speculators will always be a step ahead of the regulators. The need is not for more regulation, it's for better management of incentives.