Should Houses Be Bulldozed To 'Help' The Economy?

Steven M. Warshawsky
In today's Wall Street Journal, columnist Holman W. Jenkins, Jr., argues  that "the most efficient and equitable" solution to the "subprime mortgage crisis" would be for the federal government to use taxpayer dollars "to buy and demolish foreclosed, unoccupied, or half-built houses in selected markets."  Specifically, Jenkins argues that intentionally reducing the housing stock in four main markets - California, Florida, Nevada, and Arizona - would eliminate the "supply overhang" that is

"poison[ing] the market for undifferentiated securitized mortgage debt, which has been the source of the persistent instability in global credit markets."

In other words, eliminating some of the nation's housing stock will raise the price of remaining houses (through basic supply and demand dynamics).  This, in turn, will improve the financial viability of the mortgages on the remaining houses, including "subprime" and other high-risk mortgages; as a result, there will be fewer defaults going forward.  This, in turn, will provide greater security for the holders of "securitized mortgage debt" (i.e., mortgage-backed bonds), much of which is held by foreign investors (hence, the global dimension of this problem).  As we see, enhancing the stability of global credit markets is the ultimate goal of Jenkins' proposal.

When I read Jenkins' column (HT:  Steve Sailer), I immediately thought of the efforts during the Great Depression to raise agriculture prices by intentionally destroying crops and livestock.  I always have believed that there was something fundamentally irrational, indeed immoral, about those efforts.  After all, the purpose of an economy is to produce goods and services for consumption and investment.  There were millions of people in this country during the Great Depression who lacked sufficient food.  How could it have been sensible public policy to use taxpayer dollars to pay farmers to destroy food?  (These efforts failed, of course, because the deflationary spiral during the Great Depression was primarily a monetary phenomenon, not a supply and demand problem.)

In short, how could the wealth of the country be increased by destroying the very goods and services that made up that wealth?  

I have the exact same concern with Jenkins' proposal.  He proposes that perfectly good housing stock be destroyed in order to (hopefully) prop up housing prices.  His proposal is not limited to demolishing the worst-quality homes, which already is being done in several older cities that are experiencing demographic decline (e.g., Baltimore and Cleveland).  As he writes: 

"Only a small mental adjustment is required to begin aiming these bulldozers at ‘new' homes too.  Get over it." 

I am stunned, but frankly not surprised, by this attitude.  During the Great Depression, the business and intellectual elites believed that destroying food was the way to raise farm prices and restore "stability" and "growth" to the economy.  Now it appears that the same class of people may be heading towards similar recommendations with respect to the present housing slump.

Who would benefit from such a policy?  Not the vast majority of ordinary home owners who purchased their homes to live in, who obtained long-term mortgages they could afford, and who make their payments every month.  Rather, the principal beneficiaries of such a policy would be the speculators, i.e., those who were betting on a continued rise in home prices and planned to "buy low and sell high," as well as the bankers and financiers (including international bond holders) who facilitated this speculation.  Unfortunately, as always happens eventually, the housing bubble burst, and those still in the game were left holding the (now empty) bag.  In a free market, speculators should not be rewarded for taking risks that turn out badly.  Nor should ordinary people who walk away from contractual obligations.  

Leaving aside the business jargon and interest-group politics, the question is whether the solution to the present housing slump is to destroy wealth.   For that is precisely what Jenkins' proposal entails.  I confess I have never understood how a person or a country can get rich by intentionally destroying the very basis of its wealth.  Whatever the "solution" for the present housing slump may be - besides letting prices fall and a new supply and demand equilibrium be established, i.e., letting the marketplace "work itself out" - I am quite confident that Jenkins' proposal is not it.                     

Steven M. Warshawsky
In today's Wall Street Journal, columnist Holman W. Jenkins, Jr., argues  that "the most efficient and equitable" solution to the "subprime mortgage crisis" would be for the federal government to use taxpayer dollars "to buy and demolish foreclosed, unoccupied, or half-built houses in selected markets."  Specifically, Jenkins argues that intentionally reducing the housing stock in four main markets - California, Florida, Nevada, and Arizona - would eliminate the "supply overhang" that is

"poison[ing] the market for undifferentiated securitized mortgage debt, which has been the source of the persistent instability in global credit markets."

In other words, eliminating some of the nation's housing stock will raise the price of remaining houses (through basic supply and demand dynamics).  This, in turn, will improve the financial viability of the mortgages on the remaining houses, including "subprime" and other high-risk mortgages; as a result, there will be fewer defaults going forward.  This, in turn, will provide greater security for the holders of "securitized mortgage debt" (i.e., mortgage-backed bonds), much of which is held by foreign investors (hence, the global dimension of this problem).  As we see, enhancing the stability of global credit markets is the ultimate goal of Jenkins' proposal.

When I read Jenkins' column (HT:  Steve Sailer), I immediately thought of the efforts during the Great Depression to raise agriculture prices by intentionally destroying crops and livestock.  I always have believed that there was something fundamentally irrational, indeed immoral, about those efforts.  After all, the purpose of an economy is to produce goods and services for consumption and investment.  There were millions of people in this country during the Great Depression who lacked sufficient food.  How could it have been sensible public policy to use taxpayer dollars to pay farmers to destroy food?  (These efforts failed, of course, because the deflationary spiral during the Great Depression was primarily a monetary phenomenon, not a supply and demand problem.)

In short, how could the wealth of the country be increased by destroying the very goods and services that made up that wealth?  

I have the exact same concern with Jenkins' proposal.  He proposes that perfectly good housing stock be destroyed in order to (hopefully) prop up housing prices.  His proposal is not limited to demolishing the worst-quality homes, which already is being done in several older cities that are experiencing demographic decline (e.g., Baltimore and Cleveland).  As he writes: 

"Only a small mental adjustment is required to begin aiming these bulldozers at ‘new' homes too.  Get over it." 

I am stunned, but frankly not surprised, by this attitude.  During the Great Depression, the business and intellectual elites believed that destroying food was the way to raise farm prices and restore "stability" and "growth" to the economy.  Now it appears that the same class of people may be heading towards similar recommendations with respect to the present housing slump.

Who would benefit from such a policy?  Not the vast majority of ordinary home owners who purchased their homes to live in, who obtained long-term mortgages they could afford, and who make their payments every month.  Rather, the principal beneficiaries of such a policy would be the speculators, i.e., those who were betting on a continued rise in home prices and planned to "buy low and sell high," as well as the bankers and financiers (including international bond holders) who facilitated this speculation.  Unfortunately, as always happens eventually, the housing bubble burst, and those still in the game were left holding the (now empty) bag.  In a free market, speculators should not be rewarded for taking risks that turn out badly.  Nor should ordinary people who walk away from contractual obligations.  

Leaving aside the business jargon and interest-group politics, the question is whether the solution to the present housing slump is to destroy wealth.   For that is precisely what Jenkins' proposal entails.  I confess I have never understood how a person or a country can get rich by intentionally destroying the very basis of its wealth.  Whatever the "solution" for the present housing slump may be - besides letting prices fall and a new supply and demand equilibrium be established, i.e., letting the marketplace "work itself out" - I am quite confident that Jenkins' proposal is not it.                     

Steven M. Warshawsky