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In the Near Term, Congress Can Only Hurt on Housing

Posted By Conn Carroll On April 3, 2008 @ 11:01 am In First Principles | Comments Disabled

Covering the current financial turmoil Wednesday CNBC reported:

The root structure of the credit crunch stretches wide and deep. Many of the financial instruments involved are complex, unusual and difficult to value. Asset prices remain in a state of flux and the very players that need to be lending are the ones shoring up their balance sheets.

At the core of the uncertainty in asset prices is the uncertain resolution of the housing bubble. When home prices were going up, very few people were defaulting. Homeowners who’ve suffered a 20% decline in home prices are 14 times as likely to default as those who have enjoyed a 20% gain. [1] Now that prices are going down, people are increasingly likely to default on their loans and nobody knows how mush these houses are really worth.

Recovering from asset bubbles is painful and rarely smooth, but there is no safe or prudent way to short-circuit the process by which assets find their new, lower, and proper values based on economic fundamentals. Congressional attempts to slow or soften the process would only serve to prolong and ultimately accentuate the pain [2]. The sooner these asset prices find their proper levels, the sooner families, investors, and businesses can get on with restoring their finances and resuming normal business activity. Anyone offering an elixir to prevent or short-circuit this correction is selling snake oil.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/04/03/in-the-near-term-congress-can-only-hurt-on-housing/

URLs in this post:

[1] Homeowners who’ve suffered a 20% decline in home prices are 14 times as likely to default as those who have enjoyed a 20% gain.: http://online.wsj.com/article/SB120718217009085001.html?mod=opinion_main_review_and_outlooks

[2] Congressional attempts to slow or soften the process would only serve to prolong and ultimately accentuate the pain: http://www.heritage.org/Research/Economy/wm1874.cfm

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