Congress Wants 15,000 to Save Houses and Souls

If the early news is to be believed, we are on the verge of great stimulus, which will include giving a tax credit of 15,000 to home buyers in an effort to support the housing market. This will fail. Not just because there is a lot of pessimism floating about in our heads all the time. We are realists too. The N.Y. Times shares:

The tax break for homebuyers, which the Senate approved by voice vote without opposition, was the second amendment in two days aimed at encouraging consumers to make major purchases.


On Tuesday, the Senate approved a tax incentive for car buyers, sponsored by Senator Barbara Mikulski, Democrat of Maryland, that would allow the deduction of sales tax and loan interest on purchases made this year.

But while both of those incentives were applauded by lawmakers who said that the bill should quickly spur consumer spending , some economists said they were short-sighted and lacked the forward-thinking approach Mr. Obama has demanded.

We would agree with the "some economists" that this is indeed short-sighted, and skirts the issue. In all likelihood spending ought not to be encouraged and one can barely believe that anyone with relative sanity is inclined to spend. Oh sure there will be a buyer here, maybe there, picking up perceived bargains, but the vast majority of people will be mindful of their money, worried about employment and making sure the day to day is covered.

This daily strain and focus on the here and "now in my pocket", is evidenced by rising default rates on credit cards. The Financial Times, with eyes on American wallets, states:

Late payments on credit cards crept higher throughout 2008, said Fitch, but signs of borrower stress rose in the fourth quarter as late payments surged by 18 per cent. Charge-off rates in January were 40 per cent higher than a year ago at 7.5 per cent and were expected to approach 9 per cent during the second half of 2009.


Late payments and defaults on credit cards have been closely linked with levels of unemployment, which have risen dramatically. Non-farm employment fell 524,000 in December, contributing to the biggest decline in payrolls on a three-month moving average since 1945. The unemployment rate jumped to a 15-year high of 7.2 per cent, from 6.8 per cent in November.

It's like Congress trying to build a bridge, but starting from two distinct points on opposite shores that can't possibly intersect to suspend over the troubled waters. Try as you might, there is not enough money (real or printed) in the Treasury to re-inflate values in a manner that will make people and markets whole, or happy. Nor can you get there while simultaneously encouraging the bankers to be less stupid and less oblivious to deadbeats.

These little efforts at trying to spur demand fly in the face of a larger trend, and smart money (and one hopes people are smarter and wiser now) will not dive back in when prices are trending lower, regardless of the incentive. Those who would be so bold, and who could weather further losses before eventual future gain, are a small minority. The vast majority of the people are in over there heads in their own current situations, and that majority will not be saved by the actions of a few brave souls who decide now is the time to jump back in due to tax incentives.