Arnold Kling  

Housing Policy: What Would Reagan Do?

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Tracy Alloway finds a reportthat one of TARP's goals is propping up house prices

I remember 1980, when holding down consumer energy prices was the main goal of energy policy. Then Ronald Reagan was elected President, and one of the first things he did was deregulate energy prices. Before he did so, the prospect seemed horrifying. After he did it, energy markets worked much better, and prices eventually came down.

I feel the same way about U.S. housing policy today. Policy makers are horrified by the the thought of extricating the government from all of its efforts to keep people in houses and prop up house prices. Yet I believe that a Reagan-esque termination of government intervention would be a tonic for the economy and the housing market.


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COMMENTS (10 to date)
Scott Sumner writes:

Exactly. And it would force policymakers to focus on the real problem, which is not a shortage of housing demand, but rather a shortage of aggregate demand (with a bit of recalculation thrown in, of course.)

spencer writes:

Except that Carter effectively decontrolled oil prices in 1978 and by the time Reagan took office oil prices has already risen from $14.85 to $32.50 before peaking two months after Reagan took office at $39.50.

SydB writes:

"Full decontrol was scheduled to take place in the spring of 1981, but Reagan upon taking office lifted controls almost immediately, thus receiving credit for what was mostly the action of his predecessor."

http://mises.org/story/535

This is the problem with political and economic discussions in this country, and on this and every blog. Mr Kling sees the world through "Reagan GOP" glasses and biases his writings accordingly in support of his ideology.

I have an idea. Why not truth? Why can't we all focus on the truth rather than ideology and gaining political points.

Start now.

David R. Henderson writes:

SydB,
Arnold is correct. Reagan did decontrol. Carter had pushed for phased decontrol and he got it. If I recall correctly, controls would not have been totally lifted until October 1981. Reagan did it in early February 1981. What Arnold reports about how people thought about decontrol is absolutely true. There was a lot of fear about it. I don't see where the "Reagan GOP glasses" are in this.
Best,
David

Robert writes:

My understanding is that banks have a lot of mortgage-based assets on their books, and if housing prices fall steeply there is a risk of another financial crisis.

See: http://blogs.reuters.com/felix-salmon/2010/01/28/the-us-loan-mod-fail/

"...they’re holding these loans on their books at much more than they’re really worth, and they can’t afford to take the write-downs which would accompany principal reductions of roughly the same magnitude as the decline in housing prices. This kind of head-in-the-sand behavior can only possibly work if housing prices suddenly rebound in the next couple of years, and that ain’t gonna happen."

??

Dewey Munson writes:

When a house price changes it's the money number that is changing - the house itself is intrinsic.

A money which was a true store of value would go a long way to stabilizing shelter which is the second thing we hunt after we take our first breath.

Kirblar writes:

Is this really news or a surprise to anyone? Of course they wanted to keep the prices from deflating rapidly in the midst of the financial crisis. The problem now is that in order to recover, the prices need to be allowed to bottom out, and it's just a matter of how long they want to take to remove the bandaid propping those prices up.

pete writes:

My history is rusty, but if I remember correctly, the reason oil prices fell in the 80's was because Saudi Arabia was tired of cutting its own production to keep prices high so it flooded the market to punish other exporting nations for not maintaining price discipline. It had nothing to do with Reagan's actions, he just got lucky. What lucky event would need to happen for the housing market to heal?

Dezakin writes:

was because Saudi Arabia was tired of cutting its own production to keep prices high
In 1986, which was really what was responsible for the fall of the Soviet Union as the final nail in the coffin as I understand it.

But really this is another Republicans deregulate everything Reagan good post. Oh wait, about securitization and credit rating agencies with conflict of interest... Oh nevermind.

Now sure, all these buy a home now subsidies are dumb and economically inefficient, but they're damned politically entrenched for anyone that files taxes. People that buy a home are more likely to vote and like their subsidies. Regulations on incomprehensible bundled mortgage securities however are easy targets for fixing, but apparently in ideological conflict for the deregulation fixes everything approach.

Look, markets work thats fine. But they have to have some pure assumptions for them to work that never actually exist in real world unregulated markets, like complete transparency of information, rational players, etcetera. I mean hell, you guys are supposed to teach this stuff. So you get these guys who advocate deregulation of bad regulations that lump them all together and then you end up with Enron situations and guys like Greenspan that think that markets automatically address fraud protection so there doesn't need to be regulations on even fraud.

Good luck with getting rid of these pro-house subsidies. Get back to me when we stop paying dirt farmers to keep growing dirt for tens of billions a year before you start tackling a rather popular giveaway to people that actually vote though.

Sarge writes:

SydB,

I'm going to have to second what David Henderson says. President Carter said that the controls would be lifted at a certain point down the road, but President Reagan said, in effect, to end them now rather than later. So it's accurate to say that Reagan ended them, even if he only moved up the deadline.

It also raises the (impossible to answer) question of what would have happened had Carter won reelection. It is certainly possible that he would have pushed the deadline further or otherwise softened his move. And, had Carter never started the ball rolling, it's also likely that Reagan would have lifted them anyway, and promptly. As I said, impossible to know, but the first seems plausible and the second more than plausible.

I could be wrong though.

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