Financing Madness

Sometimes I wonder what the Bush Administration is thinking. Residential real estate has been propping up the U.S. economy for four years and frankly will continue being the only prop for the foreseeable future. The residential building industry was a big bankroller of Republican races this year. Bush therefore has two, good reasons to keep residential real estate rolling. Instead, he's undermining it. The budget deficit is driving the cost of capital up, especially long term capital (Watch that U.S. bond yield curve invert.). The budget deficit and the trade deficit are driving the dollar down, further tightening the capital markets (Ignore the news of the dollar "improving" in the last day or so. The fundamentals are still bad.). On top of all this, the White House may be planning a fatal mistake with its tax "reforms": repealing the mortgage interest deduction.

The White House plans some revenue enhancement this year by closing loopholes in the revenue code. We'll see, given that most of the beneficiaries of loopholes are big, Republican contributors. The mortgage interest deduction is for the masses, though, and so it doesn't have an industry automatically lobbying for it. All it does is fuel the economy by making mass home ownership possible. Let's face it, owning a home has a lot of extra costs. The deduction is compensation for that. Take away the deduction, and home ownership gets pretty marginal for a lot of people. Demand goes down. Prices go down. Construction goes down. The economy goes down.

What is up with that?