I’m not an economist but it seems to me that Obama’s strategy of propping up values is a wrongheaded diseconomy. Whether it’s the bailout of GM and Chrysler with its concomitant effect of propping up UAW wages and benefits or the HAMP program designed to avoid foreclosures of underwater home mortgages, the economic effects are negative in the long range. In each case an artificial value is “supported” with confiscated money in the form of increased taxes.
The results are several and all bad:
- Potential sales of these assets by economic buyers will be delayed because a market clearing price cannot be reached without foreclosure.
- Potential private market loans using these assets as security will be delayed for the same reason.
- Necessary valuations of these assets whether as security or for tax purposes will be artificial casting doubt on the results of the valuations. Shareholders or lenders have no real idea of the economic value of GM. County governments have no confidence the the assessment value of the underwater home and thus continue to over spend or commit tax revenues.
- Owners of these assets continue contributing to the support of these assets instead of choosing more economic alternatives, for instance renting instead of buying.
- Investment capital is reduced or destroyed by tax increases needed to support the government action.
- The credit of the government is damaged by the debt increases necessary to support the government action.
- And general economic uncertainty is created by the delay in the recognition of real market valuations.
Japan should present a lesson. Its bubble economy of the ’80s in real estate and equities was fostered by cheap money and the close relationship between businesses, banks and government bureaucrats. When the bubble burst in 1990 the valuations continued to be supported by the banks funding one bad loan to repay another. Write downs and write offs were avoided or deferred. Uncertainty prevailed. Business decreased and deflation ensued. All government attempts at rescue were premised on the hope that prices would recover, but they didn’t. Prices decreased with sustained deflation. Savings increased as money was more valuable than goods or services. Consumption obviously decreased. The decade of the ’90s is thus referred to as the lost decade.
So the equation of cheap expansionary monetary policy (Greenspan) and government supported value inflation (Fannie/Freddie subprime lending) created artificial values which government policy now hopes to sustain by avoiding foreclosures and real bankruptcies. Market clearing prices are avoided and economic activity is decreased.
Yesterday’s Democratic umbrage at major companies recognizing GAAP losses resulting from Obamacare betrays their attitude toward proper valuations. These ignorant socialists have put the nation well down the road to serfdom!