Needed: Glass-Steagall . . . for the Housing Market

Life after Life Support

There are no atheists in foxholes.

--Famous aphorism

There are no free market Republicans in today's housing industry.

--Real estate version

When it comes to the housing industry today, even the Republicans sound a lot like Democrats.

For now, at least, people of all philosophical stripes understand that the housing market is functioning in large part due to governmental support.

That includes providing the capital for mortgages; insuring mortgages once they're created; and providing the credit for investors to buy the resulting securities that the mortgages are bundled into.

No one is eager to see what happens if that support is scaled back precipitously.

The focus of the upcoming debate, then, is how much support to withdraw, how fast.

Reason(s) for Hope

One overlooked possibility, however, is that the housing market might actually need less help than is commonly believed.

Take, for example, the Federal Reserve's now-concluded purchase of $1.25 trillion in mortgage-backed securities -- undertaken to assure continued low interest rates, and thereby support the fragile housing market.

What happened to mortgage rates in the almost two months since the program was discontinued?

They've gone down.

Thanks, Eurozone (in point of fact, they were declining before that).

Producing "Financial Foie Gras"

Obscured by the "recent unpleasantness" is the fact that the U.S. housing market functioned successfully for more than half a century.

What changed?

Two things:

One. From 2003-2004, the Federal Reserve dropped nominal interest rates to near-zero (negative, in real terms), unleashing a tidal wave of demand for securities that paid a respectable return.

Two. Wall Street got a hold of the housing market.

If the demand was created by the Federal Reserve, the supply was provided -- on a truly breathtaking scale -- by Wall Street.

In effect, Wall Street stuffed the housing market "goose" with capital to be turned into financial foie gras.

Or at least what the ratings agencies promised was foie gras.

Glass-Steagall for the Housing Market

Which catches us up to today.

Used and abused by Wall Street, the housing market is temporarily a ward of the state.

Fortunately (unfortunately), something like this has already happened.

Before Wall Street got a hold of the housing market, it got a hold of the banking system

The direct result of that was something called The Great Depression.

But note society's response then.

Wisely, it wasn't to socialize the banking system in perpetuity.

Rather, it was to throw Wall Street out of the banking system for a long, long time, by separating "investment" from "bank."

In fact, the Glass-Steagall Act served the banking system -- and U.S. -- well for over 60 years, until its repeal in 1999.

What the housing industry needs now is a real estate version of the Glass-Steagall Act.

There's no reason the U.S. housing market of 2010-2070 cannot be as stable, functional, and largely independent as the housing market that prevailed from the 1930's to the 1990's.