I recently attended a lecture given by Arnold Kling, who is a former Federal Reserve economist on the Board of Governors staff, former senior economist at Freddie Mac, and all-around financial and monetary expert. The talk was very interesting–his appraisal of the housing collapse is that it was largely caused by priming the housing credit pump to degrees that invited over-speculation and instability. He was particularly critical of all the policies aimed at lowering down payment requirements for banks issuing mortgages.
A good question came from the audience: the standard argument in favor of government encouraging lower down payments is that it helps the working poor to start to build equity by purchasing a home—isn’t that a good thing?
Kling’s answer was great: a much better approach would be to develop policies that encourage savings so that lower income people can achieve down payment levels. Government policies aimed at lowering down payment requirements have an unintended consequence of encouraging more speculation in the housing market, which has winners and losers depending how the market moves. Improving savings, by contrast, has much less systemic risk and has the same desired boosting effect for low income people looking to build equity in a home.
For me, a bell went off. TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reform can help that. We currently have a tax system that is punishing to capital formation. Interest, dividends, and capital gains are double-taxed, once through the corporate code, and then again at the individual level. Income is taxed today, even if you just want to save it for tomorrow.
Removing the impediment to saving baked into the tax code, then, has real impacts on real people. It helps people save for down payments on homes, or to put money toward education. Perhaps, if pared with a reduction in policies meant to artificially reduce down payments, tax reform could be an important component to stabilizing the housing market.
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