Arnold Kling  

Shiller is bold?

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A reader asked me to comment on Robert Shiller's column, where he says,


In 1932, the National Association of Real Estate Boards proposed and Congress created the Federal Home Loan Bank System, modeled after the Federal Reserve System. Twelve regional banks were created, and a Federal Home Loan Bank Board, like the Federal Reserve board, was set up to oversee them. This was an ambitious plan: these banks were to be a special lender of last resort for real estate, discounting mortgages so that troubled banks and loan associations could keep issuing mortgages.

...In 1934, Congress created the Federal Housing Administration; it insured mortgages and insisted they be 20-year fixed-rate and self-amortizing.

The Federal Deposit Insurance Corporation, a radically new invention intended to prevent runs on banks from depleting resources for home mortgages, among other calamities, was also created in 1934. And in 1938, Congress created Fannie Mae, which eventually led to the huge securitization of mortgages.

Seven decades later, our reaction to the current crisis is anemic in comparison.


The way Shiller sees it, we have another housing crisis, so we need to create another set of new agencies and regulations.

Another way to look at it is as follows: all of the institutions from the 1930's, plus some created since then, have not solved today's problems. In fact, most of them contributed to the sub-prime frenzy.

The really bold thinking, in my view, would be to ask why we need to subsidize the heck out of home ownership. Saying we need to pour more government support onto the housing market is like saying we need to deal with obesity by increasing the allotment of food stamps.


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COMMENTS (10 to date)
bee writes:

Shiller must feel that large corporations need to be guaranteed a profit ... or maybe he feels that regulations will structure markets in such a manner that we can achieve perfection ... or maybe Shiller cannot let his economic training shed light on the core issues ... or maybe he wants to feel more than he wants to understand ...

Blogging has enabled me to see more clearly what an old economics prof shared with me ... many think only to justify what they want to feel ... feeling is increasingly dominating academics ... The problem is that academics is far removed from acting ...

Shiller must come to appreciate that variability is real and that its appearance in the world cannot be extracted by regulation ... I am sure that he appreciates that reductions in variance reduce the expected return

cliff styles writes:

"The really bold thinking, in my view, would be to ask why we need to subsidize the heck out of home ownership. Saying we need to pour more government support onto the housing market is like saying we need to deal with obesity by increasing the allotment of food stamps."

what you said, Arnold...

General Specific writes:

How come no analysis? Similes using "like" are fun but the reader who asked for some analysis must be sorely disappointed.

Now if you're saying that the government should remove the tax subsidy for mortgages, I agree. But that has nothing to do with the fact that markets often fail, particulalry when any fool has the ability to hang up a sign called "mortgage lender."

It's easy for people, particularly libertarians, to "perform analysis" by screaming "too much government," similar to that proverbial chicken, but it's not really analysis.

Free markets are, like, bubbly. That's my valley girl brand of simile. And bubbly stuff sometimes need a cap, like on a soda bottle (another simile), or government regulation, to keep them from bubbling over everyone else.

BTW: Still betting that housing is REAListically priced? I'm still voting for real-estate down, oil steady to up.

Nathan Smith writes:

I would agree that subsidizing homeownership is a bad idea. I suspect, for example, that it creates a bias in favor of living arrangements that make for easily definable property rights in real estate, e.g., sprawling suburbs, as opposed to densified arrangements like tenements; if so, it is responsible for a lot of extra pollution and deaths in car accidents. The subsidy is also regressive, benefiting the homeowning middle and upper classes at the expense of the renting young. Homeowning also imposes inordinate and unnecessary financial risk on some classes of the population that might do better to rent, put their savings in the stock market, and avoid the roller-coaster ride of home prices.

What I'm not sure of is whether there's a link between the *volatility* of housing prices and the regulatory agencies. Is there a way to prove that link?

Bob writes:

*IF* you support gov action in response to the subprime mortgage meltdown, it should, IMHO, mimic the RTC as a response to the thrift crisis - a limited life agency with a very specific goal. Note that the RTC liquidated failed thrift assets promptly - the highest bidder got the asset, period - and shut itself down. But I have not seen any proposals along this line.

PrestoPundit writes:

"The way Shiller sees it, we have another housing crisis, so we need to create another set of new agencies and regulations."

Hayek called this "The Road to Serfdom".

Mises put together a little collection of essays on the phenomena called "Interventionism".

It's amazing how dumb many economists reveal themselves to be when they take the role of "public intellectuals". Robert Shiller's academic work seems ok in parts (if nothing surprising), and only loopy here and there. But his true dumbness doesn't shine through quite so evidently as it does when he isn't producing "research".

We need more doors opened up on the academics -- and the professors need to be exposed to more competition, more criticism -- and more facts & ideas -- from outside the cloister

PrestoPundit writes:

"The way Shiller sees it, we have another housing crisis, so we need to create another set of new agencies and regulations."

Hayek called this "The Road to Serfdom".

Mises put together a little collection of essays on the phenomena called "Interventionism".

It's amazing how dumb many economists reveal themselves to be when they take the role of "public intellectuals". Robert Shiller's academic work seems ok in parts (if nothing surprising), and only loopy here and there. But his true dumbness doesn't shine through quite so evidently as it does when he isn't producing "research".

We need more doors opened up on the academics -- and the professors need to be exposed to more competition, more criticism -- and more facts & ideas -- from outside the cloister

Arnold is barking in the right forest but has not yet found the right tree. Government did something to create this sub-prime mess, I believe, but no one has yet described the error clearly and specifically.

For a parallel to an earlier mess, the Savings and Loan crisis, many people eventually accepted the explanation that the act of deregulating the S&L industry was criminally stupid -- while government still insured deposits. That created incentives for profligate management of S&L's, and created the S&L crisis. Government insurance of deposits should have been withdrawn (even though this withdrawal would have been hard to sell) in parallel with deregulation of S&L's.

A like story is waiting to be told about the sub-prime mess. Government did something to do "good" in the market, and wound up making a mess. But where is the expert who can tell it more specifically?

PrestoPundit writes:

Richard,

The Congress recently forced banks to lower their standards in the subprime market for minority buyers. In Orange County, CA this has created a significant part of the subprime problem. Google the issue to read more.

Also, the Fed created a classic boom-bust cycle (read some Roger Garrison) -- creating systematic errors in the economy across time. This was widely flagged years ago by Hayekian economists.

And part of the problem is simply incompetent business practices -- some of them inspired by the mathematical economics of risk, as incompetently interpreted by academic economists.

Other parts of the problem are incompetent consumers and corrupt mortgage salesmen and firms, among a host of other factors.

Punditus Maximus writes:

There was a bubble. It popped. People who were stupid enough to be invested heavily in the bubble lost money.

Any discussion of the current system that isn't bubble-focused will be wrong.

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