Thursday, April 17, 2008

Housing Crisis: Is The Solution To Allow Inflation To Run Amok?

John Makin, a scholar at the American Enterprise Institute, is proposing that we solve the housing crisis by letting Inflation run high according to an opinion piece he published in The Wall Street Journal. Makin suggests that the alternative methods of correction are worse than high inflation, and he even goes so far as to say that the mortgage market could be nationalized if we don’t do something soon.

I don’t agree with many of Makin’s views, and particularly I don’t foresee a nationalized mortgage market. First of all, his argument assumes that the government should be responsible for solving the housing crisis. If you agree that it is the government’s responsibility then Makin’s plan might not be such a bad idea (at least considering the alternatives), but I personally believe the government should stay out of it and let the market take its course. Housing prices should have never gone as high as they did relative to what people's incomes are, and the real estate market is now simply adjusting to where it should be in the first place. You could even make the case that the government exacerbated the problem through low fund funds rates and their willingness to bail out banks that made stupid decisions.

Makin’s warning of a nationalized market seems implausible to me. History has proven that private industries are more efficient than nationalized ones, and I would be shocked if lawmakers actually legitimately considered a nationalized mortgage market as a potential solution to the housing and credit problems.

The government is feeling the strain as more and more homeowners experience declining property values and request governmental support, but high inflation is not the answer. In the end, it will still cost us. Instead of having homes with negative equity we will just have worthless savings and retirement accounts. In addition this plan would really hurt those individuals who don’t own their own homes. They would feel the full impact of inflation, but without the benefit given to ailing homeowners. The only real answer is the easiest one of all: Let the markets take their course.

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