This past week the government announced that existing home sales plunged 27.2 percent in July while new home sales were down 12.4 percent. The numbers surprised most “mainstream” economists who expected more modest losses. Of course, with the housing market still in shambles the value of homes is expected to drop further than the $6 trillion already lost by American homeowners. This development coupled with continuing high unemployment and low consumer confidence is making many economists predict we are headed for a double-dip recession.
Now, naturally, proponents of the government’s failed stimulus policies have their excuses for why it didn’t work all lined up. They are not even waiting for the double-dip to officially hit. They are already claiming that the stimulus wasn’t spent on the right things and was simply “too small” to actually make any difference in “stimulating” the economy.
Here are the facts. First to address the issue of sinking home sales, no one should be surprised by the numbers. Home sales are way down for several reasons. First of all, Obama’s first-time home buyer’s tax credit expired in April. Folks are now waiting to see if Congress will enact a new credit before they buy. Second, all the signs are there that housing prices will continue to drop, so why rush into purchasing a property that in a few months might be gotten at an additional discount? Lastly, given the number of people in America who are unemployed, underemployed, and just downright broke it is no wonder that a huge expense like homeownership is not high on many people’s minds.
So the massive drop in home sales in July should not be surprising. Anyone who understands human behavior and even the most basic fundamentals of economics knows the president’s housing stimulus program was doomed to failure. During the time it was effective there was an increase in home sales and a leveling off of home prices, but once the program ended the bottom fell out. No lasting growth ensued. Additionally, many first time buyers who took advantage of the tax credit used it for a down payment. Essentially, the government was once again encouraging folks to buy houses who didn’t have the ability to save for a down payment. This probably represents a misallocation of scarce resources and we can expect to see many of these homebuyers on a list of foreclosures in the future.
Article comments
— go to most recent comments1 - Mark
Get ready for revolution or/and war.
2 - John Wilson
Yes, the housing credit made no permanent improvement. It was a 'hail mary' which might have worked in a better economy, but not this one. But it had to be tried just so we could say it's been tried.
These little patchwork measures will not correct an economy that has been seriously abused and neglected for 30 years by both republicans and democrats. We need deeper changes and I'm not sure that this generation of fumblers and opportunists is up to the job, especially the senate.
3 - Kenn Jacobine
John, I completely agree with you it has been a bipartisan bungling of the economy since at least the early seventies. It seems politicians in America don't want to make any hard choices about anything.
4 - Glenn Contrarian
Yes! Hard choices just like when we (very nearly) paid off the even greater national debt we had after WWII! How?
Higher taxes - including the 91% top marginal tax rate we had through the Truman and Eisenhower years. The top marginal tax rate was lowered in the early Kennedy administration to 70% (or 74%, can't remember which)...where it largely stayed through the Carter administration. Reagan slashed the tax rate by HALF...and not long afterward we got what was then the worst recession since the Great Depression.
Kenn, if conservative dogma were right, then the much higher taxes we had from the early 1950's through the 1970's should have been a time of crushing depression...but it wasn't. Why is that? Why is it that since Reagan took office, we've had the three worst economic crises since the Depression? Why is that?
5 - Dr Dreadful
Kenn employs the common rhetorical tactic of cherry-picking a few weird-sounding things that stimulus money was spent on, without explaining exactly why those monies were misspent.
Undismayed by Kenn's dud link, we at Dreadful Investigations decided to investigate those disbursements a little closer. (Well, actually, Newsweek and CNN did the investigating and we just took the credit.)
In our opinion, all of those projects have some merit in their own right, and might not have been undertaken had it not been for the availability of stimulus funds. But that's just our opinion. Take a look for yourselves.
Whatever you conclude, I hope we can all agree that a particular project isn't money down the drain just because Kenn and/or a bunch of witless senators say it is.
We report, you decide. Or something like that.
6 - roger nowosielski
"we at Dreadful Investigations . . ."
Nice touch, especially when applied to Kenn's "investigations."
7 - Glenn Contrarian
Ditto!
(Does that make me a 'dittohead'?)
8 - Kenn Jacobine
Guys,
You are taking a page out of Obama's playbook. Develop a distraction when you can't defend a policy. The main thrust of the article is that stimulus spending doesn't work. Glenn, you said on another thread last week that it is because we haven't spent enough. $3 trillion is not enough for you? How much would be enough?
9 - Glenn Contrarian
Kenn -
It's not just me who said not enough was spent on the stimulus - Nobel Prize-winning economist Paul Krugman was saying the same thing as early as last December. A year ago economists were upbeat because they could see clear signs of the stimulus working...but now we see it simply wasn't enough.
Kenn, it comes down to this - and I'd REALLY like you to answer the conundrum at the bottom of the following list (no BC conservative has yet done so):
When the economy goes into a recession, what do companies getting hit by the recession do to protect their bottom line? They cut costs. Right? Right.
What is the single quickest and most effective way those companies can cut costs without hurting future material infrastructure? Cut personnel costs (layoffs). Right? Right.
When tens (or hundreds) of thousands of companies nationwide lay off people, there's a significant uptick in the unemployment rate...and that's bad news for the economy. Right? Right.
When hundreds of thousands of newly laid-off people hit the streets, do they spend more than they did when they had jobs? No. They spend LESS. Right? Right.
Which means that the nation's business sector is making even LESS money than they were before the aforementioned round of layoffs. Right? Right.
So NOW the nation's business sector has to cut costs even more to stay in the black (or at least stop the bleeding)...and guess where's the easiest place to cut costs - personnel! As in MORE layoffs. Right? Right.
And suddenly even MORE people are spending less and less...and the cycle continues. How do we stop this cycle?
Do you see the vicious circle I'm describing, Kenn? DO YOU SEE IT? Of course you do. So how do you propose to stop the vicious circle I described without using a taxpayer-funded stimulus to get people back to work?
And don't try the fantasy that "the market will take care of itself", because it's the market that's stuck in the vicious circle. You and I had a discussion before about the actions of the Hoover administration after the Crash of '29...and you know that Hoover tried austerity measures (w/no stimulus) for three years. Was he successful? Did the "magic of the marketplace" take hold and make everything better? Or did this lead to the fact that 5000 banks closed the day before FDR took office?
So how to break out of the vicious circle, Kenn?
10 - Kenn Jacobine
Please answer this first and then I have a long answer for our question which I will answer tonight at home. We've spent three trillion. How much do you and Paul think we should or should have spent? How do you know?
11 - Kenn Jacobine
Even wrongly assuming that Hoover employed austerity. Why is it that the Great Depression still didn't end until sometime near the end of WWII? It took FDR about 13 years to end it with big stimulus!
12 - Kenn Jacobine
Glenn,
What you explain is insanity - that is doing the same thing over and over again and expecting a different outcome. Ask yourself this question - why are all these people loosing their jobs? It is because monetary policy of the Fed for a long time encouraged America to over invest in goods (this time houses, during the 1920's general goods and stocks). Then when the Fed decided to bring the economy in for a smooth landing by raising rates, people could no longer afford their debt payments. So they defaulted and stopped buying other stuff as well which then caused the unemployment we experience. Why would you want to do the same thing that got us into this mess in the first place (gov't spending and cheap money)? This only re-inflates the bubble. Bwcause we have gone down this path to the tune of $3 trillion we are now headed for an even larger fall and a long road back to economic normalcy.
A good economy is built on savings and investment, not debt. Stimulus spending has never worked because it is just a re-inflation of the bubble that started the downturn in the first place.
If 1974 Nobel Prize winner Friedrich Hayek were still alive he would disagree with Krugman.
He would have recommended that the gov't raise rates and cut spending to allow the market to liquidate the mal-investments made during the bubble. It would have been brutally painful in the short-term but we would be in recovery by now. The greatest historical comparison we have is the difference between what the government did during the 1920-1921 depression and what it did during the Great Depression? In 1920 Harding cut spending and the Fed raised rates - recovery came within 2 years. In the 1930s first Hoover then FDR primed the pump and the Fed initially lowered rates and depression lasted for over 15 years.
It is no wonder you hate the free market, because given your remedy on how to fix this latest crisis, you have no idea how it works.
13 - John Wilson
Nobody likes the 'Free Market', especially the business community, for they are the ones most prominent in constantly manipulating and dominating 'The Market'. Free Markets represent competitive threats to established power and riches.
One can argue that the business community is responsible for our current distress by it's twofold manipulation of government policy: by increasing fiscal expense spending government money on business favorites like war, and using monetary (Fed) policy to artificially restrict inflation on behalf of vested interests.
The 'Stimulus' is a poor relative by comparison. And, had it worked as bridge financing, it would have looked good, but the banks failed to do their part by extending the credit that would have replaced the Stimulus. And you can't blame the banks because the (crooked) Fed lent them money at 0.5% that they could put in US Treasuries at 2.5% and make buckets of money with no effort and no risk, while selectively making a few 5% showcase loans. Better yet, just leaving the money at the Fed earned them a 0.25% for not using pre-allocated money.
Yes, we should have Nationalized the banks when the crisis hit (planning to sell them off and re-establish private banking later under New Management and better banking regulations) but our politicians (of all stripes, apparently) failed the test.
Of course, the Fed should also be re-structured with less monetary power to prop up corrupt political empires with irresponsible fiscal policies as Greenspan did when he propped up Bushes extravagant fiscal acts.
14 - Kenn Jacobine
Banks and business don't mind the inflation (increase in dollars) as long as they are first in line to use the new money or credit before higher prices set in. Of course, printing new money hurts the working poor the most because they are the last to see the new dollars and by that time prices have already risen.
I agree with most of what you said, but instead of nationalizing the banks, they should have just let them go under. Anybody with money in them would have been covered through FDIC. I realize pensions would have been negatively affected, but I think all the spending and coming inflation is going to wipe out those plans anyway. The good assets of the irresponsible banks could have been bought up by responsible banks and this would have helped recovery.
15 - Cindy
Dreadful Investigations
Dr.D,
I am stealing that for my book. Hope you don't mind.
16 - Cindy
It is no wonder you hate the free market, because given your remedy on how to fix this latest crisis, you have no idea how it works.
"But it is hardly surprising: in other countries around the world where the agro-industrial model has been adopted and expanded to greatest extent, we can see how the system works. At first farmers are persuaded to increase their production using unsustainable methods, replacing native varieties and breeds with products preferred by the industry. Then the economic benefits dwindle and many small to medium size farms are forced to close, being bought out by those able to achieve greater economies of scale. We are then left with the same pattern of concentration that has taken place in all countries of the global north: the country areas become depopulated; there is an increase in machinery and decrease in people. In the end, even the large farms begin to struggle. They grow monocultures or farm intensively, and depend on the only customers who can take their produce - the large dealers and large retailers - who gradually begin to dictate prices due to their market strength, and reduce prices even further. The free market is bringing food into the hands of a few and is destroying the spirit of our countryside."
from The Plight of the Modern Farmer
12 Aug 10 - Carlo Petrini - Slow Talk
What do you have to say about Alan Greenspan's admission that he was wrong about how free markets work, Kenn?
Do you think it's possible that they don't work as advertised? Why did Greenspan change his mind?
17 - Baronius
Kenn, you may think the stimulus money was wasted, but clearly you've never seen the damage that monkeys can do when they're tweaking. You think that bad monetary policy can damage home value? That's nothing compared to a couple of chimps on blow. They can destroy the structural integrity of an entire block of row homes in one night. And if they're doing meth, it's even worse, because they try to fix the damage, and what does a meth-head ape know about construction? And they always go for the electrical or the plumbing first, and end up knocking out power to the neighborhood or causing major water damage. And sure enough, one of them is going to electrocute himself sooner or later.
In summary, this was a good article.
18 - Dr Dreadful
Be my guest, Cindy!
19 - roger nowosielski
I'd be the first to say the stimulus program has failed and that to ask for more of the same, Paul Krugman or no Paul Krugman, is sheer insanity. Not the idea of course, but the inept application of it - most of which consisted of enabling the crooks and thieves. So as far as the American people are concerned, it did amount to a diddly squat.
As to the remainder of Kenn's knowledge of economic theory and his assertions as to what works and what does not work, let each person decide for themselves.
20 - Cindy
Hmmm, Kenn inspires me to write a column, maybe I'll call it A View From A Broad.
Sorry! DrD started it! Now I am in a silly mood. :-)
21 - roger nowosielski
Lol.
22 - handyguy
Mark Zandi and Alan Blinder [and for that matter Paul Krugman] have considerably more credentials than Kenn, Roger, myself, or most likely anyone at Blogcritics to assess the effectiveness of the stimulus.
What they basically said is that, although it's virtually impossible to prove a negative, without the goverment intervention of late 2008-early 2009 we would very likely have faced a complete market meltdown [instead of the scary but brief panics we did have] and would have lost 2 to 4 million more jobs than we have already.
So 12-15% unemployment and a paralyzed financial system.
I do not claim TARP and the stimulus were perfect or that there is nothing else to be done. Just that to call them a complete failure is facile nonsense.
What Krugman and others are calling for is temporary aid to state governments, which are in big trouble. This would include funds to prevent layoffs of teachers, cops, and others, prevent cuts in social services, and also money for road and other infrastructure construction.
It's easy to sit on the sidelines at Blogcritics, with partial [or zero?] knowledge of the complete picture, and say, "You stink! You're on the side of the criminals!" or whatever.
Have fun, but you are not doing anyone any good. At least back up your claims with something more than, "We have 9.5% unemployment and the housing market sucks. This proves Obama knows nothing!"
23 - handyguy
Bette Midler once wrote a book titled "A View from a Broad." Considerably more entertaining than Kenn's articles, believe it or not.
24 - roger nowosielski
Again, credentials are impressive only to those who feel a need for some kind of authority instead of relying on thinking for themselves. It is, in that respect, akin to a religious kind of belief.
Consequently, any kind of argument to that effect, an argument from authority, that is, is bound to fall on deaf ears, especially the deaf ears of this "dumb Pollack."
So yes, I would iterate and reiterate the same old point, namely that Glenn Contrarian and people of his ilk are all too apt to transfer their religious beliefs to the so-called "experts." In Glenn's particular instance, it's quite understandable since Glenn is a believer. What's far less understandable, or excusable, is the selfsame attitude and uncritical approach on the part of self-proclaimed atheists.
But then again, the faulty premises of the Enlightenment are still with us to this very day. We've been so intent on getting out from under the shackles of religion that we have embraced an unshakable faith in man - be they bureaucrats, technocrats, or Nobel-Prize-winners economic experts.
Thus the world turns.
25 - Mark
Kenn, re your dates: In 1920 Harding cut spending and the Fed raised rates - recovery came within 2 years.
I believe Edith Wilson was still president in '20 when much of the post-war heavy lifting that you describe was done.