Hubbard’s New Nonsense
After seeing dozens of mortgage proposals emerge over the past several months, there are news stories that Larry Summers and the Obama economic team are converging on an unlikely candidate: the proposal by Glenn Hubbard and Christopher Mayer first launched on the op-ed page of the Wall Street Journal on October 2.
Without even getting into the specifics of the plan, Glenn Hubbard is about the last person who should be consulted on anything. And its not just that the economy performed dismally while he was chair of the CEA. Its that while he was Bush’s chief economic advisor, the administration was telling us in effect that they expected GDP would grow at a double digit rate in fiscal 2001. In other words, crazy #$!&. Whether they believed it or not, or whether it was just what they came up with later, at a bare minimum he was willing to keep his mouth shut when this bs was being shoveled upon us, and that’s in the highly unlikely event he wasn’t instrumental in producing the bs.
Kwak goes on, providing details of the plan. (Given the hallucinatory nature of Hubbard’s previous “work” I simply refuse to give Hubbard enough benefit of the doubt to conclude its worth wasting my time and reading the thing myself. Kwak’s failure to reach the same realization indicates clearly lacks sufficient cynicism and is probably way too nice a guy.) It seems Hubbard and Mayer feel that home prices have to be stabilized. They’ve fallen enough. Now, perhaps Hubbard feels his home has fallen in value by enough, but my wife and I are in the market to buy a house. We can afford to buy a home in the area where we live; if necessary, we could probably pay cash for most homes for sale in the neighborhoods (though it would require tapping what we’ve set aside for retirement plus what we’ve set aside to survive should our income dry up during this economic mess but I’m very reluctant to tap that) where my wife is interested in buying. But… we’re still renting because its still quite a bit cheaper rent than to buy. Quite a bit. Anyway, it seems Hubbard and Mayer provide some math to back up their statement, but once again, I’ve seen Hubbard’s “math” before and I refuse to look at it again. As Hubbard’s then boss has since remarked, “Fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”
Regardless, this seems to me be a more ambitious Glenn Hubbard than we’ve seen before; I don’t remember any talk of buying up Nortel stock back in mid-01 because it had already fallen too far, or that Pets.com needed saving.
Now, leaving aside the issue of whether or not we should try to stabilize home prices, the “how” is just as inane. Kwak tells us “Hubbard and Mayer argue that housing prices are mainly a function of real mortgage rates” and “the policy proposal is simple: force mortgage rates down to 4.5%.” Yeah, that’s right. Prices are falling because mortgage rates are too high. Sure, and the real reason people aren’t buying GM cars these days is, as the Big 3 tell us, that financing is hard to come by. It also must be the reason nobody wants to buy that bridge in NYC I have for sale. I can tell you this – if and when my wife decide its time to buy, sure, we’ll pay some attention to mortgage rates and try to get the best possible rate. But the mortgage rate isn’t what’s keeping us from pulling the trigger.
Think of it this way… even in LA, the median home price is now below 300K. So I went to google and found me a mortgage calculator. By coincidence, this one has as a default, a home price of $300,000 with a downpayment of $250,000. Seems about reasonable. According to that calculator, a 4.5% rate gives you a monthly mortgage of $1,631 a month. The default rate of 6.5%, which seems about right, is $1,944.75 a month. The difference – about $3,700 a year and change – is not what prevents people from buying homes. Sure, Hubbard might say the present value of that $3,700 difference every year for 30 years comes to about $60 K (assuming about a five percent inflation rate, and given how much money is going into the system, sooner or later we’re gonna have inflation, even if we get a spate of deflation first) which is real money for most of us, but that ignores one detail: most of us are concerned that Hubbard’s buddies have so screwed things up that job losses are going to get worse, leading to the economic mess getting worse and home prices dropping even more, regardless of what happens to mortgage rates. Put another way… mortgage rates aren’t what’s causing home prices to drop at this point; the problem is state of the economy, and in particular, the state of the job market. And mortgage rates ain’t gonna affect those things.
So basically, the plan amounts to taking steps that won’t work to fix a problem that isn’t there, peddled by a guy who sold snake oil to us before. If Obama and Company really are thinking of taking Hubbard seriously, as far as I am concerned they are forfeiting any claim on being treated with respect by the rest of us.