Wasting the Crisis?
by Bruce Fisher
How Washington and Albany could shape the future
“There is,” said America’s chief banking regulator to a Washington forum this week, “some virtue to regulation.” How astounding that this simple sentence would be such a revelation in our nation’s capitol.
But as Federal Deposit Insurance Corporation chief Sheila Bair uttered those words at a Brookings Institution conference on Tuesday, Congress was preparing to sign over $700 billion of your money to fix a problem that regulation could have prevented.
Think of it this way. Had not President Bush and the Republican-dominated Congress eviscerated the old body of regulations—the kind that has so far kept banks solvent—America would be $700 billion richer.
We could be having a debate about whether to spend almost $1 trillion of our tax dollars on schools, science, new energy sources, or even on a new war. Instead, your Congress and your president are going to rent $700 billion from Chinese, Saudi, and other investors to buy up the bad loans and bad bets that a bunch of speculators made on gambles Bill Clinton wouldn’t have let them make, but that George Bush allowed them to.
It’s enough to make one want to quote Sarah Palin, the one politician who seems to say the word “reform” more than any other these days.
So let’s talk about reform, and your money, and what government should do now that there is a genuine, world-class financial crisis.
Too many houses
First, let’s talk about housing. Housing is at the root of the mess. At the root of the root of the housing mess is the problem of oversupply. There’s too much housing for the market to absorb.
Look around you. Within the 42.5 square miles of the City of Buffalo, for example, there are at least 10,000 vacant houses, and no credible government rehabilitation program, even while there is an ongoing program of construction of new, federally subsidized housing for which there is little market. That’s because there is ongoing, locally subsidized construction of housing in the suburbs, despite a declining population in the region, and therefore a declining housing market overall. (Some of us think that oversupply of housing is itself a reason why there is a declining population…) But because the incentives are there to keep building new houses, developers keep building new houses. Where there is oversupply, prices (i.e. values) stay low. That’s great news for folks who want to buy a cheap house. It’s not such great news for folks whose entire lifetime savings is the equity in their paid-off home.
That’s what oversupply does. Yet some people still get paid to develop and build housing. There is, for example, a new development built by Mayor Brown at the intersection of Sycamore and Jefferson. Why—is there a demand for it? No. Is there a shortage of supply? No. Will there have to be incentives, discounts, and subsidies (like, maybe, a special mortgage of the subprime variety) put forward in order to get somebody into those houses? Probably. Will the value of other houses go down if these houses go vacant? You betcha.
Multiply the problem of housing oversupply, and include places like Lancaster, Hamburg, most of northern California, much of Michigan, all of Florida, and a few other places in America, and you get the problem that is at the root of the $700 billion item in front of Congress.
So it’s time for Congress to curtail the incentives for building excess housing. And it’s time for New York State to stop allowing established housing stock to be devalued by the over-production of new housing stock.
You’ve read it before: The lack of a regional land-use planning regime—which New York State could require, and which the federal government could require, too—serves as an incentive for suburban municipalities to invite new home construction. The lack of a joint City of Buffalo and first-ring suburbs plan to manage the inventory of vacant, foreclosed housing, and to preserve rehab-able housing, is an incentive to build new. The incentives are skewed, so the market is skewed, and owners of older homes get screwed.
Steps toward sanity
Step one is to get the supply of housing somehow re-related to the demand for housing. Step 1-A is to get the incentives right for rental housing, too.
Thirty percent of households rent. Lots of poor people, and lots of old people, rent. Many of them pay over half their incomes in rent—something unheard of among owner-occupiers. University of Virginia economist Edgar Olson says that the federal government could help over two million more people who need rental assistance, and still spend not a dime more than it spends now, if only it would create a tenant-based voucher system rather than continuing to subsidize the dozens of housing authorities all over America.
And what would the housing authorities do with their various projects? Sell them, says Olson, or let voucher-carrying renters rent them. Rental vouchers cost less, give renters more choice, and make landlords meet basic standards.
And then there’s the step that splits the presidential candidates right down the line.
John McCain doesn’t care much for public transportation. Barack Obama does.
Public transportation policy is where foreign policy, housing policy, transportation policy, public finance, and environmental concerns all meet.
The massive federal intervention into the capital markets this past week—made necessary because of all the direct and indirect federal interventions in the housing economy—has already occasioned an abrupt halt to most housing construction.
What should this country do about all the people who work construction jobs? The answer: This country needs to invest public (and possibly private) funds in building, extending and refreshing all the public transportation systems that cheap oil and cheap gas used to make uneconomical.
There is, surprisingly, an emerging consensus among economists from Harvard, UCLA, and right here in Buffalo, who say that extending public transit systems—buses, rail, and trolleys alike—will actually add value to existing housing. Harvard’s Edward Glaeser recently opined that nothing will ever replace the personal automobile, but he and others have come around to seeing that the old rule about public transportation—which is that houses near transit lines fell in value—has turned entirely around.
Obama gets it about this connection. Obama has a very detailed presentation about investment in public transportation, and about metropolitan-wide economics, housing policy and “green” rehabbing on his Web site. The McCain campaign is more or less silent about public transport, contradictory about the housing issue, and the candidate has changed his messaging day by day on the financial bailout.
I guess that about says it. The Washington crowd that is starting to sound inviting about regulation and public investment seems to be finding a partnership with one of the candidates, but not the other.
Bruce Fisher is Buffalo State College visiting professor of Economics and Finance, where he directs the Center for Economic and Policy Studies.