Given the column inches that the NYT has devoted to harshly denouncing the country's farm price support programs is is striking that it can be so strongly supportive of house price support programs. I would go back and quote their condescending comments among the economic illiterates who support farm prices support programs, but it's not worth the trouble. The basic story of course is that Congress cannot hope to sustain house prices at their bubble-inflated levels and it would be foolish to try. If it passed a bill that opened the spigots to buy more homes at bubble-inflate prices, then this might temporarily slow the price decline, but eventually it would lead to more homes being constructed, further increasing the over-supply of housing. This is called "supply and demand" and we teach it in intro economics. Perhaps the NYT would prohibit further home construction or find some other mechanism to maintain artificially high prices in the housing market, but it is unlikely to prove successful in the long-run, even though such measures can easily cost the government hundreds of billions or even trillions of dollars. The best thing that can happen now is a rapid adjustment of house prices to trend levels. This will be very painful, but there is no way to avoid the deflation of a housing bubble. The time for government was the years when the bubble was inflating, from 2002-2006. Unfortunately, the NYT editorial board, like the rest of the policy establishment, was asleep at the wheel back then. The best that can be done now is to ameliorate the pain, for example by giving homeowners facing foreclosure the right to stay in their home as renters. Perhaps something can also be done to increase the retirement income of tens of millions of baby boomers witnessed their life-savings disappear with the housing crash. But the NYT's house price support program would just delay the pain and at the end of the day make it worse.
--Dean Baker
