Benjamin Montgomery

What Is The Real Disease? It Matters…

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Is the root cause of the financial crisis house values falling or over valued houses?

It is essential to understand this distinction to know how to properly solve the problem.  Depending on which disease is diagnosed the country should prescribe 2 very different medicines.

If the problem is that house prices are falling then the solution is to make them more expensive.  The government would do this by inflating house prices and forcing people to buy them. This would be accomplished by injecting cash into the economy that can only be used to purchase houses. (the bailout)

If the problem is that houses were overvalued then the solution is to get them properly valued as quickly as possible.  The solution to this would be to do nothing.  Allow the market to correct itself and possibly remove the programs that allowed houses to get over valued in the first place. (no bailout)

In the first case the ones that would benefit are the people that own houses and mortgages that are overvalued.  In the second case the prudent investor that did not jump on the easy money train will be rewarded.

It is important to remember that every dollar spent on housing is a dollar that can not be spent on infrastructure, health care, education and defense.  It is not possible to have our cake and eat it too.

The questions are what sort of behavior should be rewarded?  And where is the most productive place for the dwindling capital that exists in our country?

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Written by benmont1981

September 26, 2008 at 9:24 am

Posted in Uncategorized

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