TJP

What Caused the Housing Market Failure?

By Byron A. Ellis-September 29, 2008

The Administration, the Federal Reserve, and the Treasury have yet to present conclusive evidence of an impending economic collapse. And, their argument that bailing out Wall Street would benefit Main Street has not been deemed credible by American taxpayers.

Most taxpayers know that Main Street and the American economy benefit from personal income increases, not from income increases to Wall Street “Fat Cats.”

The proposed Wall Street bailout will not increase the income of average Americans nor will it reduce housing price uncertainty.

So what will it do? Bernanke and Paulson have not provided clarity on this issue. Rather, their responses have been vague; they claimed that the economic crisis is too complex for a clear and concise execution plan and the delineation of likely outcomes.

However, taxpayers expect government officials to concisely articulate the problem, provide accurate diagnoses, and lay out a framework that captures the nature of challenges and roots of ineffective outcomes.

But, Bernanke and Paulson argued that they would confront challenges and make decisions as they go signaling that they are unsure of the roots of ineffective outcomes. Such approach, however, is unacceptable even for Kindergarteners; no wonder taxpayers are upset and skeptical about using their money to provide welfare to millionaires.

Do they think the public is incapable of understanding economic challenges? Either they do, or they themselves do not have a clear picture as to why previous fiscal and monetary policies have not worked.

Bernanke is a former economics professor and Paulson a former Wall Street money manager. Thus, it is possible that they might be too removed from the day-to-day struggles of the average American taxpayer.

It appears that they have ignored the adverse effect of rising energy prices on taxpayers’ incomes. For example, consumers have had to reallocate limited household income to cover the rising costs of gasoline and other necessities, such as food, utilities, and so on.

Income previously allocated to housing cost had to be reallocated to higher transportation and food costs.

It is this reallocation of income among the consumer budgetary outlays that has created market failure in the housing industry.

Market failure is associated with illiquidity problems. For instance, the length of time that it takes to covert housing assets into money and to the uncertainty of housing values creates housing market illiquidity.

Demand is a function of income and prices. Therefore, lack of housing demand and housing foreclosure are due to the reallocation of housing outlays to cover the cost of higher transportation cost. Lack of housing demand, inward shifts of the housing demand schedule, leads to housing price uncertainty, and hence housing market failure.

Failure of the housing market slowly ripples through the U.S. economy affecting all housing related goods and services, such as the demand for mortgages, wood, carpet, sheet rock, housing appliances, and so on, as well as all associated employment in housing related goods and services.

Therefore, rewarding Wall Street Fat Cats with $700 billion of taxpayers’ money does not solve Main Street's illiquidity problems.

Taxpayers need to look for a third political Party more aligned with taxpayers’ interest and on November 4, 2008, sent an unequivocal message to the two major political parties perpetrating this welfare giveaway to Wall Street Fat Cats.

Rewarding or bailing out Wall Street Fat Cats will not resolve market failure in the housing industry. The bailout does not affect the average taxpayers’ income. Hence, it will not cause an outward shift of the housing demand schedule.

Remember housing demand is a function of consumers’ income and housing prices and the bailout will not increase consumers' income nor stabilize housing prices.

So, from on economic point of view, the bailout is unlikely to reverse the housing market failure, except if rising energy prices subside.

Therefore. government policies should focus on the exogenous events adversely affecting the price of crude oil, in this case the military invasion of Iraq.

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