Saturday, February 25, 2006

President Bush On Housing: ‘Things Cycle’

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Despite all the scandal going on in Washington, the White House appears well aware of the potential economic disaster that would result if housing bubbles popped in major cities across the country. The administration is just very careful to not utter those two words. The "housing bubble" is a beast whose name we dare not speak aloud.

The signs of concern are undeniable.

For one thing, a proposal to reduce the mortgage interest-rate income tax deduction has been squashed, despite the fact that it was born out of an advisory committee convened by President Bush. Last week Bush offered his assurance that the deduction would remain a part of tax law, and then made a worrisome comment about mortgage interest rates. Here it is as reported by Reuters:
He went on to praise new Federal Reserve Chairman Ben Bernanke. However, he added, “If I were you I’d be worried about interest rates.”
Perhaps partly in response to this, Federal Reserve Chairman Ben Bernanke said this week he will not use interest rates as a method to influence housing and stock prices.

As quoted by Bloomberg News, via the Los Angeles Times website, Bernanke said:
"It's generally a bad idea for the Fed to be the arbiter of asset prices," Bernanke said in response to a question after a speech at Princeton University in New Jersey. "The Fed doesn't really have any better information than other people in the market about what the correct value of asset prices is."
Bloomberg News points out in its story that this position is the same as that of Bernanke's predecessor, Alan Greenspan.

But it also echoes remarks made by President Bush during a Q&A at JK Moving & Storage in Sterling, Virginia on January 19, 2006:
QUESTION… I guess my question is, as the consequence of this great housing boom has increased the cost of housing so much not only in this area, but throughout the country, it's very difficult for me to envision my kids being able to afford a home, or even the workforce that drives much of our school systems and our police and (inaudible). How do you see the federal government helping this workforce, (inaudible) -- to be able to afford housing close to where their jobs are?

THE PRESIDENT: Markets adjust, and the role of the government is to make sure the market is able to adjust in a way that is not precipitous and disruptive. When you have wage and price controls, for example, in history, it has tended to not allow the market to adjust in a smooth function, a smooth way. It doesn't function properly. And, therefore, the consequences of government trying to either manage price or demand is very severe.

So to answer your question, one role of the government is to make sure that markets are given the flexibility to adjust in a way that doesn't cause major disruption. If houses get too expensive, people will stop buying them, which will cause people to adjust their spending habits.

Secondly, setting of interest rates affects your business. You'll be happy to hear that the White House doesn't set interest rates. The Federal Reserve Board sets interest rates. I get to name the Chairman; I named a good guy in Ben Bernanke. But it's their job to be independent from the political process and look at market forces -- in all aspects of our economy -- to determine the interest rate to be set. Obviously, they look at inflation, consumer demand, et cetera.

So to answer your question, the simple answer is, let the market function properly. Let the market function properly. I guarantee that your kind of question has been asked throughout the history of homebuilding -- you know, prices for my homes are getting bid up so high that I'm afraid I'm not going to have any consumers -- or my kid -- and yet, things cycle. That's just the way it works. Economies should cycle. We just don't want the cycles to be so severe that it gets disruptive so that you get thrown out of business, for example, or somebody gets thrown out of work.

Of course, it would be a mistake not to include in this list the Survey of Consumer Finances released this week by the Federal Reserve, a report that showed Americans are relying on their homes as retirement funds, rather than putting cash into savings accounts and retirement plans.

All this, and yet, no one says those two words. They don't even whisper them.

— The Boy in the Big Housing Bubble