0
0

Big Government Libertarians


 invite response                
2005 Dec 5, 9:05am   17,386 views  164 comments

by HARM   ➕follow (0)   💰tip   ignore  

I’ve noticed that lately there have been a lot of big industry players raising Cain over proposals to limit or even eliminate the mortgage interest deduction (http://tinyurl.com/bht2q). These are the same “pro-business” industry blowhards who typically lobby with all their might against the evils of government “regulation” (which usually translates as “consumer protections” or “eliminating my favorite sacred-cow tax subsidy”).

I have a few questions for these people:

  • Why should the government get to pick market “winners” and “losers” in the investment game? What makes your asset class more worthy of taxpayer subsidy than any other?
  • Do generous tax subsidies and GSE risk underwriting in the RE market actually result in lower prices/increased “affordability” for consumers, or the exact opposite?
  • If the gains of the last several years had *nothing* to do with tax incentives or GSE risk underwriting, then why worry if they get removed?

    Consider the incentives government currently provides for individual homeowners: the 1997 tax law greatly increased the RE capital gains exemption ($250K single/$500K married: http://tinyurl.com/bsfzd). This exemption was even extended to second (investment) properties, for reasons we can only “speculate” about (*smile*). Add to this the already existing generous mortgage interest tax deduction and the popular “1031” tax shelter. Result? A tax incentives system rigged heavily in favor of RE “investing” over saving or investing in any other asset class –stocks, bonds, commodities, etc.

    If this weren’t lopsided enough, taxpayers are also partly subsidizing risk for banks and mortgage companies. By selling their conforming loans to the GSEs and selling non-conforming (sub-prime) loans to private MBS issuers & REITS, the lender can simply walk away from default risk with profits in hand and go make more bad loans. (Btw, the GSE conforming loan cap was just raised another 16%: http://tinyurl.com/azd48.) Chickens will no doubt come home to roost for investors in private MBS paper at some point, but GSE-issued MBS paper has the implied full faith and backing of the U.S. taxpayer. This (assumed) low risk has translated into extremely low risk premiums by investors, and incredibly loose-to-nonexistent lending standards. To this day, the GSEs, which still purchase some 50% of the nation’s residential mortgages for MBS resale, remain privately owned for-profit companies with exclusive government monopoly charters, along with implied taxpayer guarantees and access to unlimited Treasury capital. And let’s not forget that the Fed kept their funds rate negative in real (inflation-adjusted) terms for two years, which no doubt “helped” many home values go parabolic over the past few years.

    Whatever you subsidize, you get more of –right? Now the taxpayer is heavily subsidizing both sides of the RE market: supply and demand. Predictable end result: historically low risk premiums (low rates on mortgages & MBSs) in a time of historically high default risk, sky-high prices and overextended borrowers. See PMI Group’s breakdown of default risk by city at WSJ.com: http://tinyurl.com/dd6ps.

    Is having the government pick winners & losers really a “free market” or “pro-business” philosophy? Are you a “Big Government Libertarian”?

  • Discuss, enjoy...
    HARM

    #housing

    Comments 1 - 40 of 164       Last »     Search these comments

    1   San Francisco RENTER   2005 Dec 5, 10:59am  

    First: Bull$hitter, you rule.

    Second: My opinion is that the very low interest rates of the past years had more to do with inflating the housing bubble than the tax incentives for investing in RE. And I tend to doubt that the FED was TRYING to create an asset bubble, they were mainly trying to stave off a recession. That being said, it seems the Government likely has a vested interest in incenting the masses to take on a large mortgage debt burden. Kind of ties them to the land in a modern form of serfdom and ensures they work hard each day to pay off that debt and do their part for the economy. And the whole time they're slaving to pay off that debt they get to pay interest to the banks as a form of wealth transfer from the lower classes to the upper classes. But it sure as Hell beats living in Somalia or Iraq now don't it!!

    2   HARM   2005 Dec 5, 11:16am  

    @San Francisco RENTER,

    My opinion is that the very low interest rates of the past years had more to do with inflating the housing bubble than the tax incentives for investing in RE.

    Though it's had to isolate/quantify how much of an impact any one policy decision has on a system as complex as the RE market, I agree the ultra-low interest rates were probably a bigger factor. I do think the 1997 tax changes took time to work into the buyer's psyche (and were pretty much ignored especially during the Dot.com era) and were a contributing factor, though.

    The main point I'm trying to get across here is you have these RE insiders who have steadfastly maintained that there was no bubble, prices are supported by fundamentals, blah-blah, and now terrified that the government might remove their tax security blanket. These are the same types pretending to be in favor of "free enterprise" and "deregulation", as long as that doesn't mean taking away THEIR taxpayer-subsidized goodies.

    And I tend to doubt that the FED was TRYING to create an asset bubble, they were mainly trying to stave off a recession.

    I agree with this as well, but create one they did. ;-)

    3   HARM   2005 Dec 5, 11:23am  

    If I had to break it down by percentages, I'd guess the 'Top Bubble Causes' table would look something like this:

    40% ultra-low interest rates/massive M3 Fed money creation
    30% GSEs/MBS risk underwriting
    20% RE-targeted tax incentives
    10% herd mentality/greed factor (once the ball got rolling)

    4   HARM   2005 Dec 5, 11:31am  

    At the rate we're going here, Patrick may have to close this blog down for the holidays.

    ZZZZZZZZZZZZZZZZZZ....

    5   Peter P   2005 Dec 5, 11:34am  

    At the rate we’re going here, Patrick may have to close this blog down for the holidays.

    Do not worry. I am back. Let's blow some thread bubbles!

    6   HARM   2005 Dec 5, 11:36am  

    Hey, Peter P --welcome back!
    Now all we need is for Jack & Surfer-X to return and we're off the the races. :-)

    7   Peter P   2005 Dec 5, 11:41am  

    40% ultra-low interest rates/massive M3 Fed money creation
    30% GSEs/MBS risk underwriting
    20% RE-targeted tax incentives
    10% herd mentality/greed factor (once the ball got rolling)

    That 10% herd mentality creates a feedback loop though... In the end, psychology is 95% responsible.

    8   HARM   2005 Dec 5, 11:46am  

    The “free market” is lovely when the Government subsidizes you. But when market forces bite you in the ass you come begging at the Government’s door for bailouts.

    Bingo! this is what I see as the ultimate hypocrisy in the 'pro-business/anti-regulation' camp.

    9   HARM   2005 Dec 5, 11:50am  

    Hey, anyone else having trouble getting to Ben Jone's site tonight?: http://thehousingbubble2.blogspot.com/

    10   brightc   2005 Dec 5, 12:04pm  

    Google blog site (blogspot.com) is down. I was trying to read that mini-msft blog, but couldn't for the whole day. Only the front page of blogspot.com is up.

    11   HARM   2005 Dec 5, 12:12pm  

    thanks, brightc

    12   praetorian   2005 Dec 5, 12:35pm  

    Is having the government pick winners & losers really a “free market” or “pro-business” philosophy?

    No.

    Are you a “Big Government Libertarian”?

    Yes. If only to contain the talking nazi monkey menace.

    Cheers,
    prat

    13   Allah   2005 Dec 5, 1:12pm  

    Say it aint so…This could never happen right

    What can never happen?

    14   Allah   2005 Dec 5, 1:17pm  

    Looks like Bens blog was deleted. I get a blogger page with "not found" attached.

    15   Allah   2005 Dec 5, 1:19pm  

    oops, my mistake.... I forgot to put "the" in front of housingbubble2.

    16   Girgl   2005 Dec 5, 1:37pm  

    San Francisco Renter says:
    That being said, it seems the Government likely has a vested interest in incenting the masses to take on a large mortgage debt burden. Kind of ties them to the land in a modern form of serfdom and ensures they work hard each day to pay off that debt and do their part for the economy. And the whole time they’re slaving to pay off that debt they get to pay interest to the banks as a form of wealth transfer from the lower classes to the upper classes.

    *Excellent* conspiracy theory! I love it.
    I'd like to add that the only thing that's missing to complete the screwage of the middle class is making the bubble burst.
    Who's going to buy foreclosure properties on the cheap? It's going to be the "smart money" guys who've been collecting vulture capital for a while now.

    17   HARM   2005 Dec 5, 1:49pm  

    @joey,

    I love how the first guy they quote is from Freddie Mac, who tries to spin it as a temporary Hurricane Katrina/Wilma thing.

    18   Jamie   2005 Dec 5, 2:11pm  

    Who posted this longest thread topic in the history of thread topics? The disembodied head?

    Peter P, welcome back! We missed you. The blog was fading fast.

    19   Jamie   2005 Dec 5, 2:22pm  

    Oh, and HARM, I guess you might be the thread poster? Sorry, I get confused and picture disembodied heads when there is no name signed to the thread. Weird hang-up, I know.

    Oooh, look I'm all chatty tonight. Two whole posts. Not a single valuable contribution. My work here is done.

    20   HARM   2005 Dec 5, 3:57pm  

    @Jamie,

    Forgot to make my mark --yes, this is my thread :-) .

    21   DinOR   2005 Dec 6, 12:44am  

    Harm,

    You've really nailed it here! This is the core structural cause on which the entire bubble is built. Originally designed as a way for empty nesters to downsize w/o being penalized it spun out of control to the complete debacle we are now confronting. Because this had the "hearth and home" appeal it was thought that Americans would not hesitate to do extensive home improvements w/o fear of incurring a huge tax bill when they ultimately sold. Enter greed. Now "ultimately" translates into 2 years and one day for tax free money! Can't wait 2 years? The formula was pretty simple and universal. Just do yet another re-fi, spend cash on anything you can take to your next house (to hell with improvements) then write off the points and additional interest! In times past most of us dreaded April 15th. Seems like lately people can't wait to get their turbo tax, then file electronically and have their returns, yes their returns, direct deposited into their checking accounts. What's not to like?! Who needs to save or invest in the stock market when you can spend your way into prosperity?

    22   Allah   2005 Dec 6, 12:56am  

    Check this article out Take this house and shove it

    23   San Francisco RENTER   2005 Dec 6, 2:35am  

    I read "Take this house and shove it", interesting. However, the article accepts as gospel the dogma of "renting bad, I must buy to get ahead." I mean they give examples of all these people leaving Long Island NY and the Bay Area because they "can't afford to buy a house." But the thing is, median income levels in both of those areas are still higher than they are in most of the rest of the country and rent is relatively cheap, especially when compared against that high median income. So why are people afraid to live and rent in these high housing cost areas, earn the high income, sock away that money, and get ahead? Unfortunately, I think most people lack investing knowlege and are still gun-shy from the tech bubble NASDAQ crash. It's too bad. Housing is just the "it" asset class these days, have to move away because I can't afford a house. Oh cry me a river...

    24   San Francisco RENTER   2005 Dec 6, 3:24am  

    I don't think the original poster was trying to insult Libertarians in general(although I'd be happy to), I think he was just trying to point out the dichotomy that a lot of business bigwigs seem to exhibit these days: being pro free market when it benefits them, and begging to the Government for help when the free market starts to work against them (usually as a result of their own faulty business decisions).

    25   HARM   2005 Dec 6, 3:35am  

    A1337 & Sriram,

    This was my post, and I was definitely NOT trying to insult Libertarians with it. The term "Big Government Libertarian" is an obvious oxymoron (true Libertarians are against big government) and it was meant to be ironic. San Francisco RENTER said it best:

    I don’t think the original poster was trying to insult Libertarians in general... I think he was just trying to point out the dichotomy that a lot of business bigwigs seem to exhibit these days: being pro free market when it benefits them, and begging to the Government for help when the free market starts to work against them (usually as a result of their own faulty business decisions).

    He nailed what I was trying to do here.

    Personally, I like Libertarians and have even considered joining the party myself. They come very close to my own political philosophy on a variety of issues.

    26   HARM   2005 Dec 6, 3:41am  

    Once again, "Big Government Libertarian" is meant to be IRONIC.

    There is really no such thing --only hypocritical business leaders who want "less regulation" when it suits them, but demand big taxpayer bailouts after they ruin their businesses, thanks to their own greed and stupidity.

    27   HARM   2005 Dec 6, 3:48am  

    @SQT,

    . ;-)

    28   HARM   2005 Dec 6, 3:59am  

    hell if there is a well known liberertian elected to office you can Name, let me know

    We should only be so fortunate.
    The voters have plenty of alternative parties to choose from every election cycle, and yet they have been brainwashed into thinking they only have two (usually bad) choices.

    29   HARM   2005 Dec 6, 4:12am  

    @PolishKnight, not a bad topic for a future thread.

    This just in...

    Housing Bubble Bursts in the Market for U.S. Mortgage Bonds
    Dec. 6 (Bloomberg): http://tinyurl.com/7dl57

    30   HARM   2005 Dec 6, 4:29am  

    ...but you can take 125K after 1 year. or about 10,500 of profit per month you’ve lived there (doubled if you are maried)

    A1337,

    Thanks --until now, I was under the (wrong) impression you had to hold the house for the full 2 years, but as you pointed out, not always so:

    http://www.deadlinenews.com/capgains.html
    Two-year requirement loophole

    A related law also makes provisions for you if, through some unforeseen event, such as a job change, illness or some other hardship, you are forced to sell before you meet the two-year residency requirement.

    The federal Internal Revenue Service Restructuring and Reform Act of 1998 says you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early.

    That means if you only live in your home a year before you are forced to sell, you can exclude from taxes up to $250,000 in capital gains if you are married and file jointly or $125,000 for separate and single filers.

    Shouldn't be too hard to fake a "hardship" and qualify. This just further reinforces the perception that ordinary people are exploiting this loophole/subsidy to flip properties.

    31   KurtS   2005 Dec 6, 5:15am  

    i’m really think the next jump is to gold.

    I also suspect that's the next mania, and I've already noticed the media priming the appetite for that. Keep on the lookout for gold cheerleading.

    32   Peter P   2005 Dec 6, 5:27am  

    I also suspect that’s the next mania, and I’ve already noticed the media priming the appetite for that. Keep on the lookout for gold cheerleading.

    I will not be surprised that the next bubble is in equities.

    33   San Francisco RENTER   2005 Dec 6, 5:29am  

    Don't worry, I'm not going to insult any Libertarians because I actually share many of their ideas and principles. But the one Libertarian principle I cannot agree with is the idea of a completely "Laissez Faire" (hands-off) free market with no rules or Governmental regulations. I am definitely oppossed to big Government, but I think Government rules and regulations are necessary to lay down the foundation of the free market and the provide the rules by which the game is played. Otherwise you don't have a free market, you have Capitalistic anarchy. There are a number of issues for which a Corporation would have no incentive to pursue if not for Governmental rules: pollution inhibibiting smokestacks on factories for example. There's got to be rules so you can punish people when they break them.

    34   San Francisco RENTER   2005 Dec 6, 5:30am  

    I'm not putting any money in gold right now just because of how high it's already run up.

    35   Peter P   2005 Dec 6, 5:37am  

    But the one Libertarian principle I cannot agree with is the idea of a completely “Laissez Faire” (hands-off) free market with no rules or Governmental regulations.

    So you are against "market fundamentalism". This is completely understandable.

    36   Peter P   2005 Dec 6, 5:38am  

    I’m not putting any money in gold right now just because of how high it’s already run up.

    This is not a good reason though.

    37   San Francisco RENTER   2005 Dec 6, 6:21am  

    "If you borrow to make investment, the interest you pay is deductible as investment expense. It would be strange if mortgage interest were singled out for exclusion." - H.Z.

    Agreed, excellent point. However, it is also strange right now that RE investors get a capital gains exemption and other investors do not.

    38   Peter P   2005 Dec 6, 6:27am  

    Agreed, excellent point. However, it is also strange right now that RE investors get a capital gains exemption and other investors do not.

    Exactly. Also, we should issue "margin calls" to investors with upside-down mortages.

    39   HARM   2005 Dec 6, 7:05am  

    As long as the mortgage interest deduction is roughly in line with deductions provided to other asset classes, then I suppose it's ok (the point being not to favor RE over other investment types). But the capital gains exemption --especially for second homes-- and the "pro-rata loophole" should definitely go.

    @H.Z.,

    What do you think of the Presidential tax refom panel's proposal to replace the mortgage deduction with a tax credit (which would also be available to renters)?

    40   Allah   2005 Dec 6, 9:14am  

    It is considered “immature” to be renting too long. Especially by fiancees and wives. The “earn the high income, sock away that money, and get ahead” strategy does not go over very well with them.

    It's no wonder the divorce rate is so high!

    In a normal market, buying is way better than renting....but we are far from a normal market! The sheeple don't understand that just because you rent now doesn't mean you will rent the rest of your life. It's all about time preference, that is why you can sell something for 10x its price if something is on backorder....always a sucker to overpay you for it.

    Comments 1 - 40 of 164       Last »     Search these comments

    Please register to comment:

    api   best comments   contact   latest images   memes   one year ago   random   suggestions