Last year, the Wall Street Journal published an article titled “The Folly of Economic Short-Termism” authored by Allan H. Meltzer, a professor of public policy at Carnegie Mellon University. The gist of the piece is that the author thinks that the Federal Reserve needs to focus more on implementing policies to increase long-term confidence in the U.S. economy, and less on pursuing another round of short-term economic stimulus. He also mentions that the M2 money supply in the U.S. has been over 10 percent for the past six months, a sign of more inflation in the future.
So what does “economic short-termism”, inflation, and the consumer confidence have to do with Miami’s real estate market? In many ways, this way of thinking and these economic conditions are inter-connected and do impact and will continue to affect our real estate market.
According to the author, there are many economists and Wall Street interests suggesting that the Federal Reserve should pursue a third round of quantitative easing. This move will further boost the M2 money supply and further increase the risk of inflation. This idea is very consistent with the government’s response thus far, which has been to apply band aids and hope for some magical fix to the ailing economy and housing market.
The government has provided incentives to homeowners to pursue a short sale or obtain a first-time home buyer tax rebate, but we do not address the long-term implications of homeowners strategically defaulting on their mortgages. Do I have the magic bullet to cure our housing and economic problems? No, but these short-term band aids have done nothing more than kick the can down the road. Until we deal with the fact that the consumer and real estate markets, both residential and commercial, are over-leveraged and underwater, we will remain in the same quagmire.
Homeowners need to recognize that owning real estate is a long-term financial commitment and that a home is not a liquid asset nor ATM. However, bankers also need to take responsibility for flooding the market with easy mortgages.
It’s time for the policy makers and banks to focus on the cancer instead of just treating the patient. More stimulus may save a few jobs and provide some short-term relief, but this will do nothing to stave off inflation and resolve all the bad debt on our books.