The Endless Dream of Re-inflating the Bubble

I don’t have any deep thoughts on this housing plan, except to say that it appears that it won’t deliver any kind of substantial economic benefits to me. Which, while too bad, is probably a sign of a good plan since there’s no good reason the government should be trying to deliver assistance to me.

Unfortunately, though, this means that the plan probably won’t do what most Americans want. Lots of people looked at what houses were selling for in 2006 and 2007 and decided that the houses they owned were worth a lot of money. In fact, their houses weren’t worth nearly that much, the 2006-2007 buyers were overpaying. But people adjusted their psychology to a world in which they owned an extremely valuable asset. In 2008, and now again in 2009, sale prices are coming down to a more sustainable level. Which is creating a foreclosure crisis among a minority of people, people who may be helped by Obama’s plan. But it’s also leaving a much larger set of people feeling poorer than they felt in 2006 and 2007 when their homes were “worth more.” What they really want is the government to come up with a plan that will somehow get them their money back. Make them rich again—as rich as they were in 2006 and 2007. But the problem here is that that wealth never actually existed. There wasn’t enough income in the United States to bid up the value of prices that high. And there’s nothing anyone can do about that.

But this impossible dream of re-inflating the housing bubble and making all the wealth reappear is going to die hard. Clever, but stupid, politicians are going to try to convince people that they have plans to make this happen, and they’ll criticize the Obama administration for not getting the job done. It’s important to understand, however, that we’re not talking about real assets that vanished. The houses are still there, and they’re still as good or bad or useful or non-useful as they ever were. What’s vanished is a speculative mania, and public policy can’t—and shouldn’t—create a new one.