Monetary Policy Sucks, Part IV: What do you do during a real estate crash?
Scott Sumner isn’t a bad guy. He’s a good guy. He’s smart. He’s creative. He’s forceful. His ideas about NGDP aren’t all wrong.
But someone needs to tell him that monetary policy sucks even during the good times. It sucks because it uses real estate as the primary vehicle for economic stimulation, which causes all sorts of bad outcomes for our economy.
And someone needs to tell him that right now, monetary policy is particularly bad. While it sucks even in the good times, right now monetary policy is nearly impotent.
The U.S. real estate market is in the middle what will be a legendary bust. Real estate prices are going down more than in the great depression. Nobody wants to borrow money to buy real estate.
But that’s the channel that monetary policy uses. That’s the part of the economy that monetary policy stimulates.
What monetary policy does is stimulate the economy by inducing people to borrow or not borrow money for real estate deals. That’s why it works well at all.
So how cheap would money need to be to induce people to buy real estate that’s going down 5% per year?
We can talk about monetary vs. fiscal policy all we want, but until at least one person who is advocating monetary policy identifies the exact group of people who are going to start borrowing enough money to stimulate the economy, why should we bother to respond?
Corporations don’t need to borrow – they are sitting on a record horde of cash (they have more today). So the only channel left for monetary policy to work is through real estate.
Tell me, advocates of monetary policy, how is this supposed to work?
And why would you want it to work? There is a good chance real estate will drop another 20% or more in price. Do you want to saddle more people with houses they cannot sell, and mortgages that are too big?