Op-Ed: Pay Builders Not to Build
Subsidizing industry may be only way to end the crisis.
Editor's Note: Mason Slaine was formerly President of Thomson Financial and is now CEO and founder of MLM Information Services, a leading business software concern. He has written and spoken widely on business and economic affairs for over 20 years. This is his first op-ed for Minyanville.
The US government is no stranger to intervening in commercial markets. For more than 50 years, the United States has helped manage agricultural prices by, among other things, paying farmers not to plant various crops in order to maintain price floors.
This has worked well, and probably saved our country's role as breadbasket for the world. The government also provides similar support for many other industries through various import tariff and quota programs. Again, they're generally believed to serve good purposes.
So why not do the same thing in housing? We have too many homes for sale, and prices are being continually depressed. This in turn has led to massive failure in the financial services industry, since these homes are the collateral that banks, insurance companies, and others hold. This collateral is ripping a hole in their balance sheets and threatening to create chaos as it continually diminishes in value.
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Even today, we're building new homes at an annual rate of 500,000. Builders on average earn about $50,000 a home in gross profit. So why not pay them not to build? If the government gave the builders a subsidy of $50,000 to not build (up to 500,000 homes) it would allow the builders to maintain their infrastructure without actually having to build anything. Additionally, the government could punish builders who build anyway by taxing new homes $50,000.
This would surely hurt employment in the building trade, but it would only be needed for 12 to 18 months or so. And the most it would cost would be $25 billion - a lot less than $700 billion.
The results would be immediate. The dreaded inventory of homes for sale would decrease dramatically. The law of supply and demand would cause housing prices would stabilize and thus end the free fall in bank balance sheets as well as personal balance sheets. Thus confidence in the credit markets would return and employment would gradually uptick. After 12 to 18 months, building could resume, but would hopefully be constrained by significantly better lending practices than the craziness we've had in the past.
This is a relatively simple idea. It will, however, take courage to enact. The building trade -- which includes companies like Pulte (PHM), Ryland (RYL), Toll Brothers (TOL), and KB Homes (KBH), among others -- won't like it.
It's hard medicine - but it will work, and won't put our future generations into hock. Isn't that more important?
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