Sunday, February 15, 2009

This recession's chain of events

Click on the image to see it full size.

Here is a little diagram I drew to point out the chain of events that is occurring in our current recession. I marked "falling housing prices" as being caused by the free market to emphasize that it is the natural result of high housing prices. However, in reality every item along the chain is being caused by the free market. The actions in red represent the federal government's attempts to weaken the link between falling housing prices and rising unemployment.

Many people may be tempted to try to prop up high housing prices, and that is what the economic stimulus package's $8000 tax credit is attempting to do. However, last year's $7500 tax credit failed to have a noticeable effect. At best, attempting to prop up high housing prices in the near term will only make the decline last longer, which in turn will make the recession last longer. President Obama should realize that it is in his own interest to let housing prices correct as fast as possible, so prices are no longer falling when he runs for re-election in 2012.

1 comment:

  1. I'm involved in the housing industry and last years 7500 no interest loan was to small too give much of any incentive at all. In areas where prices are still falling the small, awkward benefit did nothing.

    This year's real $8,000 will do a lot, especially for first time buyers of modestly priced homes, but will also help those with an intent to move up........ or somewhere else, sell their existing home.

    This is a good stim as on a new home the few front end dollars spurs all of the costs and labor to build it and it's in new homes that most buy new appliances and furnishings that are largely made here in the good old USA, or what's left of it.