Stimulus is a Phantom Menace (Part 3)

If you read part 2 you might think we’re gloomy China bears.  But we’re not just here to warn about China’s Keynesian folly and its love of the Phantom Menace.  Economics is no respecter of nations or people.  The US remains the chief culprit and the stakes in its bubble blowing game have never been higher.  Doug French has a great piece  on Mises.org on the idiocy unfolding in the US housing market titled “Stopping the Cleansing“.  No one can rationally deny that the US housing market reached totally unsustainable levels of activity in recent years and that home prices hadn’t blown off far too high.  But, as we explained in Stimulus is a Phantom Menace (Part 1), a kind of willingly irrational hope exists that King Barack will be able to restore the bubble conditions and that this time it’ll be different. 

No it won’t. 

Trying to reverse the housing market correction in the US is like getting ready to surf a tsunami on a piece of driftwood.  New home buyer tax credits, mortgage restructuring incentives, and mortgage security purchases by the Fed is collectively the most lame of stop-gaps in a market that is ready for any excuse to correct and springloaded for bust.  House prices probably should have fallen 80-90% in the US.  Instead, helicopter Ben put a giant paper trampoline underneath the plunge and has so far managed to keep home prices just about treading water.

But you can’t argue with massive vacancies that have sprung up all over the US.  Vacant lots strewn all over the landscape have become about as American as apple pie and Super Bowl Sunday – just the way it is. 

As French so plainly points out, 

“…with new-home sales falling to a national annual rate of 342,000 units in December, there is no business reason to invest in the highest stages of production. The current depression in home construction still has work to do in clearing away the malinvestments of the last decade’s housing boom.”

Indeed.  Trying to resurrect the corpse that is the overdeveloped real estate sector is like trying to electrocute life into an Egyptian mummy – you may get some jerks and convulsions here and there, but in the end when the power’s turned off again the lump is as lifeless as it was when you started. 

French cites some amazing square-peg housing metrics which the Phantom Menace is nonetheless trying to fit into a round demand hole, 

“A year ago…the vacant developed-lot inventory in metro Atlanta exceeded 150,000. That’s a lot of lots. Assuming the 2009 number of new-home sales — 14,000 in Atlanta — holds constant, the city has more than a decade’s worth of finished-lot supply. Even if the Atlanta market returned to yielding 30,000 sales per year, the area has 5 year’s worth of supply.” 

That’s a lot of housing supply.  Imagine trying to stimulate that even more! 

But trying Obama and friends are.  Included in the complex housing bailout morass is a provision to allow big construction firms to offset profits made as far back as 2004 with current 2009/10 losses, generating about $33 billion of tax refunds.  The big homebuilders only know one thing – keep building.  With the Fed buying mortgages and pushing mortgage rates to record low levels again, and with rebates pouring in, you can bet construction companies are trying to get the concrete flowing again. 

As French explains, 

“…while returning taxes to businesses is a wonderful thing, home builders are reading the distorted economic tea leaves. These seem to say that low interest rates and tax credits will eventually bring buyers back to their subdivisions, while many of the big builders’ smaller competitors were washed away for good by the housing tsunami — so ramp up the higher-stage and durable-production process by investing capital in building lots.” 

If this continues can there be any other scenario but more ruin for the US economy, for the banking system, and for ordinary folk caught up in the malaise? 

French finally reminds us through the analytical prism of the great Murray Rothbard that, 

“If government continually props up demand and in turn prices, it will only bring about a permanent surplus of lots and houses. “The more these readjustments are delayed,” Rothbard explained, “the longer the depression will have to last, and the longer complete recovery is postponed.”” 

American’s seem to have an indomitable spirit and for that one has to reserve some admiration.  They are overcomers and certainly harbour an envied eternal optimism and confidence.  But, so did the Bolsheviks, and all their insistence on waring against economic reality only landed them in the sewer-pipe of history.  The average American thinks his prosperity is permanent and his government will make things right.  In reality though his nation’s economy has been running on empty for a long time and the only thing keeping the mummy wriggling is a supper-charged jolt from the Fed.  Eventually someone has to pay the electricity bill. 

The Fed’s monetary candy floss and mortgage purchases, government tax breaks and rebates, mortgage ‘modifications’, and all other manner of free lunches being dished out right now represent easily one of the biggest frauds in economic history.  The lone entrepreneurial wealth creators out there are fighting against the unstoppable force of legislated lawlessness.  Money printing is rife and will only get worse.  The wealth of the nation is being stripped with every dollop of fake monetary miracle-whip. 

The Phantom Menace has been sent forth from Washington and its claws are reaching deep into the bowls of a hapless economy desperate to be absolved of its debt sins…

…but the Phantom Menace is no saviour.