Tuesday, December 23, 2008


As you all know I find the concern about foreclosures of mortgages overblown. The actual foreclosure rate for mortgages stands at 2% when it was 1% in 2004 and 2005, before the meltdown in the housing market. Most people are convinced that people will not pay on their mortgages if the house is worth less than the balance due on the loan. But this has not happened in a major way. I insist that the foreclosure rate has not increased to the extent that it should destroy the economy.

No, the actual case is that people have seen their home values decline to the point that they are worth less than the balance on the present loan. Therefore, they are not able to borrow more against their home. Thus they feel more poor and have cut back their consumption.

Regardless of the debate as to the real importance of declining home values and the actual rate of foreclosures, there is a way to make it easier for people to stay in their homes. We hear about auctions of homes with foreclosures due to nonpayment of the mortgages. What about the auctions of homes for nonpayment of taxes? As far as I can determine, the auctions for nonpayment of taxes run about the same rate as those for nonpayment of mortgages. So how to remedy this? Easy, the government simply suspends collection of all or part of taxes on the homes. This would make it easier for people to stay in their homes. And this is a direct action, instead of government lending to banks in the hope that the banks will lower interest rates on mortgages and thereby help people stay in their homes.

What's that, the property taxes are local taxes so I am asking local governments to rekindle the economy. Well Uncle Sam has a fund to use to encourage banks to lend more money to home buyers. Why not use that fund to compensate local governments for the loss of property taxes? It could be done the same way as with the banks, the Feds lend the local government money.

Now I hear lots of people say that those who lose their homes because of mortgage problems should not have bought the homes in the first place, they had no right to buy the home. So what about those who lose their home for failure to pay taxes? I guess they should never have bought the home since they cannot afford the taxes.

Local governments already reduce taxes for some home owners. Florida just adopted a law to reduce property taxes for many more home owners. Two comments here, first this has not reduced the rate of foreclosures due to nonpayment of taxes and it is unfair to those who must pay the taxes in full. Yes, I am familiar with the arguments for these lower taxes, but they do not reduce the rate of foreclosures due to nonpayment of taxes and they remain inherently unfair.

So how do I see the situation? Focusing on keeping people in their homes misses the point. The foreclosure rate is still relatively low. Curing this problem will not solve the overall economic slump. It will only allow people to stay in their homes, a good in itself, but not the solution to our economic problems.

As any good economist will tell you, the answer lies in pumping up demand. No demand, no production, no economy, which was my first lesson. Now one way to do this is for Uncle Sam to spend more, which he is doing and will continue to do. Another would be to have home prices increase, thereby increasing the ability of homeowners to borrow, as they have been doing in spades over the last decade. This also makes the home owner "feel more wealthy" and thus able to consume more. I guess the real debate should be over if we should stimulate the economy with public or private expenditure.

This then becomes the old debate about consumption. I come from the proposition that we cannot consume too much. I do not get into the debate about what is a "proper" rate of consumption since that has to do with value judgments, not economics. In fact my definition of economics is, "to satisfy the perceived needs of the people." The key word here is "perceived." I do not question the validity of the need, leaving this to my Neo-Calvinist friends.

I answer any discussion of what constitutes the "proper" level of consumption with Leo's "Magic Number," 2222. Now what does that mean? The human body survives on 2000 calories a day, 200 centiliters of water, and an ambient temperature of 22 degrees Celsius. Less than this and the corpus soon expires. Now we can get to the 22 degrees with clothing or shelter or heat, but below that temperature one expires in a matter of hours. My point is that anything over my number 2222 can be called excessive consumption.

Regardless of what constitutes the proper level of consumption,we need to pump up demand right now to revive the economy.

Leo Cecchini

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