These days are going to be remembered in History. People will talk about the first decade of this century for a lot of things. No wonder America and US will be most used words. I have been saying that these are interesting times but almost every month there is at least one event that makes these times even more interesting.
This week there came an idea, a brand new idea by John Mauldin and its one hell of an idea! indeed! Its no secret that US is under tremendous pressure due to the bust of housing and credit bubbles and economists all over the world are puzzled on any possible solution. What is worse is this crisis has infected entire globe and if there is no fast solution whole world will fall into The Great World Depression. So many economists, so many solutions. Some say make USA - USSA (United SOCIALISTS States of America) by nationalizing rogues of past, some say print, print and print more fiat money, some say throw out the immigrants as they are snatching jobs from Americans. There are others who like me who want rule of real Free Markets and let the excesses work out themselves, let the rogues get punished by Mr. Market. But, the wonderful idea by John is so different that it made me put it here in this post.
John's idea is simple - let US have a brand new scheme for immigrants, offer them citizenship if they buy a house! John is so brilliant! This idea has origin like this - There is a long and painful process for obtaining US citizenship and all immigrants who are living there know it. If those immigrants are given an opportunity like this they will rush in and a good part of house inventory will get sold resulting in house prices stabilizing and may be growing in a year (or even earlier). As this crisis originated with housing downtrend, it would get corrected with stabilized house prices. This idea is indeed awesome and there is going to be a good debate over it.
This is not first "one helluva" idea by John Mauldin and if you read his letters as do I then you must remember his idea of scraping "Marked to Market" rule. This was also a very interesting idea in itself as if banks are allowed to keep those toxic products on their balance sheets and they don't need to "Mark them to Market" periodically it would relieve them from substantial pain and writeoffs. Its not that John is alone in such big ideas, there are ideas like forming a "BAD Bank" that buys all toxic assets (?) of all other banks and make them healthy again! These two ideas are already under serious consideration by US Govt (as media reports) and I am sure this "Welcome Immigrants" idea is also going to be considered seriously.
Now, the problem is we humans never learn from our mistakes (at least the majority of us, and that's what matters). History tells us that Keynesian economics is a blunder and the more we are with it more we are going to suffer in future, but still majority of today's economists follow Keynes! No lessons learned from so many events in the past century before and after Keynes theory was official!
Let me put my views on this particular idea of "Welcome Immigrants". On first reading it looks like "why didn't anyone think about it for so long?" Now, thinking about it following things come to mind:
Immigrants in US are desperate for American citizenship and all will rush in to buy houses to grab this "once in a lifetime" opportunity. Is it true? yes, may be. But have they gone through the details about how many of the immigrants already have bought houses there and are now facing same issues like foreclosures, falling house values etc. I don't know the stats but I guess a good percentage falls in this category.
The other thing that needs to be considered is law of demand and supply in its crudest natural form. It means price discovery is a result of balance between natural demand and supply factors. This has more to do with mass psychology rather than imagination alone. Now, considering the economic outlook is going to be subdued at best and house prices although down a good percentage from their peaks, fundamentally they are still overvalued in most parts of US (the real value is when majority of people can afford to buy houses with their own money and this is certainly not the case). The temptation of American Dream may not be that big now.
Even if we consider that above mentioned constraints do not pose a big problem in the way of this brilliant idea, there are issues that must be taken care of:
Public Anger: Ordinary people do not understand complicated economics and their emotions always have upper hand in their decision making. Today most Americans see immigrants as their competitors rather than bricks of growing economy. This psychology reflects truly in statements of some congressmen who publicly have called for "Fire non-US workers first". There are already such rules in place for TARP receiving firms! Can we really expect the public mood to turn 180 degrees? Very difficult.
Having said the above, I am not very hopeful of this idea materializing but if it does, who knows it might work! But, this will be yet another BIG mistake in terms of intervention in Free Market, but who cares? When they are working day and night to invent one after other "Crisis Postponement Plan", we can expect anything.