Wednesday, February 18, 2009

Voluntary Capital Stock Destruction Programme

Governments around the world are keen on throwing trillions of dollars out of the window, and economic advisors and lobbyists of all stripes have an idea of how to best waste that money. So I thought I will also contribute to this. 

Housing prices remain the most critical variable in the current mess. Unless housing prices bottom, especially in the US, there is no end to the banking system convulsions. There is a relatively cheaper way - cheaper as in less than a trillion dollar way - to achieve this.

The median price of a US home is around $200K. If the US govt buys 1 mn homes at an average price of $200K and destroys them, it will cost the govt $200 bn. If that doesn't support house prices, the govt should buy another 1mn homes at $200bn, and destroy them.  If even that doesn't work, spend another $200 bn to destroy another 1mn homes. By that time, we would have probably taken care of all the excess inventory in housing, and put a floor on prices. Also, investors who have lent money to these 3 mn. houses through the securitization route would have recovered a decent amount of money, so they would also be better off. 

Now if this destruction is distasteful, govt can do something else - buy 3 mn homes and quarantine them, and announce that under no circumstance will these houses come to market till 2025.   By 2025, however, these unoccupied houses would anyway have become uninhabitable, and any new owner would be destroying them and rebuilding a new house. So, my preference is voluntary capital stock destruction.

There are many precedents to this idea. These precedents are called wars. The only difference is that in a war, it is somebody else who does the capital destruction. Here, we would be doing it ourselves. In a war, the GDP of a country usually increases.  

Basically, we would be digging a hole where one was filled in the last few years to increase nominal GDP, so that cash flows get generated and debt burden becomes manageable.

Now why somebody won't suggest this idea in serious policy discussions where economists are happy to blow up $2 trillion is beyond my understanding. 


Econlogic said...

By far the best idea I have seen for a long time!

One "social improvement" to your idea: Give the houses to the homeless with resale restrictions.

Along similar lines: The Fed should buy houses rather than agency MBS and completely side step the dysfunctional monetary transmission.

At least conceptually, there can be any asset backing for base money.

Gaurav said...

I agree. If the aim is to target asset prices, well target them directly. Fed can definitely hire 100K people and spend $10bn in salaries to identify properties by state, region, district etc. We are talking of trillions here.