Fausta's Blog

American and Latin American Politics, Society, and Culture

May 11, 2005 By Fausta

So why do we need more Fed rate hikes?
asks Larry Kudlow

In the last economic cycle the Fed ignored falling inflation and instead aimed its guns at the Internet bubble. We soon were reminded that any time you deflate the money supply, the overall economy slumps badly. Stocks delivered their worst performance in over 40 years. As for signs of inflation today, the price of metals and overall spot commodities are dropping, gold is going nowhere, and long-term bond yields are at 45-year lows. These tried-and-true inflation indicators are saying: “No inflation.”

So why do we need more Fed rate hikes?

(An aside: futher good news in this morning’s NYT U.S. Trade Deficit Falls Unexpectedly in March.)

Earlier in the article, Kudlow had stated,

It seems apparent that Greenspan is not targeting market-price indicators. So what is he targeting? Maybe he has the so-called housing bubble in his sights, or the mortgage credit-expansion behind it. If he is watching housing, he’s looking the wrong way. The key reason behind the surge in housing investment is the shower of tax advantages that have fallen on this sector since the 1997 tax bill. On a tax basis, it’s much better to invest in homes than in stocks as home-sale profits are tax-free up to $500,000.

Bureaucrats just love to meddle with the housing market.

Locally, for over a year now the Princeton Regional Planning Board have been trying to limit the size of homes. The discussion initially pondered whether to limit the homeowners’ right to sell their properties if they knew the buyer would tear down the existing house and put up a larger one. Fortunately this idea was dismissed. Now the PRPB’s looking at restricting the size of homes. The Packet refers to it as Princeton planners tweak proposed ‘McMansion’ regulations. The Town Topics puts it a little more bluntly: Limit McMansion Size, Board Says.

Fernando Guerrero, a Hodge Road resident, worried that restrictions on building size would have a negative fiscal impact on the Borough, while hindering future property values by not allowing future residents of that section to build up to the properties’ potential.

Mr. Guerrero, who lives in one of the priciest streets in the Borough, is correct on both counts:

  • It behooves the Borough to have more properties that pay real estate taxes of $50,000/yr instead of $10,000/yr, especially since the Borough and the Township approach the taxpaying public as a bottomless source of funds.
  • More restrictive building regulations have a deleterious effect on real estate values.

Additionally, the restrictions would have the effect of keeping the lower-priced neighborhoods as less desireable. The higher-rpiced neighborhoods would continue to escalate in price while the owners of lower-priced homes would not have the possibility of getting true full market value for theirs, since they prospective purchasers would know about the restrictions.

To Greenspan and all bureaucrats: please stay out of the housing market.

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