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August 14, 2009

Comments

Tom

"Don't worry, it'll be fine" seems like an honest and credible assessment. The "it's anybody's guess" statement seems rather dishonest. For one thing, most of the so called "baillout" is not charitable: it will have to be paid back at some point. The "stimulus" is money borrowed at very low interest rates, so it might as well be free money. We've undergone severe deflation when accounting for housing and commodities, so an inflationary monetary policy is prudent. Obama and congress are already talking about cutting spending and raising taxes, and pay-as-you-go is being considered for most policy decisions such as health reform. The Fed is buying back T-bills as we speak. If you think that injecting temporary liquidity into a crumbling frozen financial market was a bad thing, perhaps you can explain why?

Nathan Smith

Oh I'm not complaining about the Fed. I'm complaining about the... *cue scary music*... SPENDING. And Obama and the Congress are talking about *raising* spending (see the health care bill).

No, I think we have big big reasons to worry. (Wow, though, if Tom is this chipper after the Obama deficit explosion, imagine how much he must have liked Bush! Oh wait...)

Tom

I think the spending so far of this presidential term would have occurred with nearly any of the candidates running for office (Ron Paul excluded). I'm not going to fault Obama for something that most people would have done. Bush is the one who started the spending in the first place, which I don't fault him for and neither did any of the Republican candidates (excluding Ron Paul). If I were president, I probably would have been more like Ron Paul on principle, but I'm not sure of myself that Libertarian principles would have handled this crises better than that of the two major parties; I'm just not smart enough to know that.

Joyless Moralist

I blamed Bush for reckless spending... even though on the whole I *liked* Bush. I blame Obama even more... because he's made the problem a lot more serious.

Nato

I actually think that it has turned out astonishingly well so far. Credit has tightened, but not as disastrously as might have been the case, supply chain deadlocks are clearing up and the best credit-dependent firms have been able to find alternate financing. That said, the fiscal trajectory we've seen outlined is deeply problematic, to the point where I just assume it's not true. I suspect this may be the reason why the market has so far been pretty sanguine - all the major market actors assume that it just couldn't go that way. Nevertheless, the longer the real alternative takes to materialize, the more the market will start to worry.

Nathan Smith

While I'm not against higher birthrates, it seems we could just build fewer houses in that case. I don't see why it should cause the current problems.

The mortgage interest tax deduction wasn't a necessary or sufficient condition for the housing bubble and the crisis, but it probably did make it worse, if nothing else because it interferes with making smart decisions. If there were no tax difference either way, and if the Federal Reserve tried to keep housing prices stable, then people making a decision to buy a home would just think, "What do I pay in rent? How much is it worth it to me to have the freedom to develop a house as I see fit? All right, then I'm willing to have a mortgage payment of $X." The government's misguided efforts to promote homeownership distort these decisions in two ways. First, you have to think about how much you'll save from the mortgage interest tax deduction. Second, you have to calculate the likely change in the house's value, which could be dramatic. This makes it very hard for people to make good choices, and when they make bad choices, it's hard to see them as wholly responsible for them.

A weird feature of the mortgage interest tax deduction is that it encourages high-income people to buy especially big homes. I don't know how major this factor is, but it seems like a perverse thing for policy to do.

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