Friday, October 08, 2010

Fed should destroy 2mn homes

If Fed were to buy 2 mn. homes in US at $200K apiece, and destroy them, it will cost $400bn. After that, housing inventory is gone. Housing starts will rise from current 300K odd level to 600K level, and housing growth (to which a lot of things get ultimately linked) will lead to rebound in economy. It will increase employment without a doubt, as construction generates employment.

This is much better than the cost of any other alternative that is being proposed. Print money and we don't know whether it leads to inflation over time. Increase fiscal deficit and we don't know what taxes are over long-term. In this solution, US government will take a one-time hit of $400bn. Because economy will start growing robustly again, that should be more than offset by the reduction in fiscal deficit and anxiety.


The Arthurian said...

Hello, Gaurav. The "Next Blog" button brought me to you. I really enjoyed the notes on Keynes, 3 or 4 posts there.

In regard to destroying homes as a way to boost the economy... The friends of Bastiat would complain about the destruction of property, but that misses the point.

What I see is that your plan relieves homeowners of $400bn debt and frees up a stream of income for other uses. And this, I think, is the absolutely essential step.

I appreciate that the destruction of property creates an incentive for the production of replacements. And apparently, housing drives the economy. Still, as I see it the problem is the excess of debt, not so much the excess of housing. There are still homeless people, after all.

I think if we wiped out only the debt, that would be enough to restore economic growth.



Excellent sugestion