We are still waiting for the final ARRA bill to be agreed upon, and at last passed and placed on the president’s desk for signing. I started to read the summaries in the paper that compared the House version with the Senate version, but decided that was a waste of time. Now I could be reading the bill as it came out of the conference that met to reconcile those differences, but since it could still be changed again I’ve decided it is best to just wait until we get the final version. Then we can know what is in the bill in regard to real estate.
We are also waiting for Tim Geithner to give us more details in regard to the FSP, especially concerning foreclosures. We expect this news in a couple of weeks, from what I’ve heard.
In the meantime the Washington Center for Real Estate Research (WA State University) has published the 4th quarter report Housing Market Snapshot just today. The results show that our county, Mason, is not as bad as some other counties, but it is also not doing that well either.
Like others, I believe that the housing market will improve as the economy rebounds. It may be that as money loosens up the lower interest rates for mortgages will entice people out of their fear, and into new homes. Real estate is still the biggest purchase most people will make in their lives, and we can’t blame anyone for sitting tight right now. Somehow we need to see people get their confidence back again.
For my part I think we need a good dose of spending by the government, and I’m looking forward to the passing of the ARRA bill. As I’ve tried to understand it I kept running into the mention of Keneysian Economic theory. I’ve heard the term before, but didn’t have any idea what it was, so I looked it up. Here is a brief description:
Keynes explanations of slumps ran something like this: in a normal economy, there is a high level of employment, and everyone is spending their earnings as usual. This means there is a circular flow of money in the economy, as my spending becomes part of your earnings, and your spending becomes part of my earnings. But suppose something happens to shake consumer confidence in the economy. (There are many possible reasons for this…). Worried consumers may then try to weather the coming economic hardship by saving their money. But because my spending is part of your earnings, my decision to hoard money makes things worse for you. And you, responding to your own difficult times, will start hoarding money too, making things even worse for me. So there’s a vicious circle at work here: people hoard money in difficult times, but times become more difficult when people hoard money.
The cure for this, Keynes said, was for the central bank to expand the money supply. By putting more bills in people’s hands, consumer confidence would return, people would spend, and the circular flow of money would be reestablished. Just that simple! Too simple, in fact, for the policy-makers of that time.
If this is the proposed definition and cure for recessions, then what about depressions? Keynes believed that depressions were recessions that had fallen into a “liquidity trap.” A liquidity trap is when people hoard money and refuse to spend no matter how much the government tries to expand the money supply. In these dire circumstances, Keynes believed that the government should do what individuals were not, namely, spend. In his memorable phrase, Keynes called this “priming the pump” of the economy, a final government effort to reestablish the circular flow of money.
The Keynes explanation above seems rather good common sense. At least now I know a bit more of what underlies the ARRA plan. I’ve added a link to the WA State Center for RE research to this blog so you can check it out whenever you are in the mood. You can go here to read an article that talks more about Keynesian economic theory, and some other theories, too. It is kind of interesting. This article ends by claiming that “The re-emergence of Keynesianism is testimony of its staying power. Almost certainly, future economic theories will incorporate its findings. “
Tags: Center for real estate research, economy, housing, Keynesian, market
[...] economist will tell you, is for people to get back their confidence. The whole purpose of the Keynesian economic plan that is now in place is to prime the pump with government spending, and thereby to [...]