As if our economy didn’t have enough problems, misguided government efforts to prop up real-estate prices are making things much worse.

The apparent reasoning, if there is any, behind these efforts is that if real-estate prices fall, banks will have more loan losses, which will restrict lending and slow economic growth. Unfortunately, this reasoning could not be more wrong.

It is true that lower real-estate prices would cause more loan losses at banks from legacy loans they made years ago and have held on their balance sheets as well as from collateralized debt obligations and other securities tied to real-estate prices.

However, the banks are not lending anyway. Lending is at multi-decade low because of tight credit standards and much lower loan demand from more conservative borrowers.

Banks are just sitting on the free money they’ve been given by the taxpayers and the Federal Reserve and using it to speculate in financial markets or get a guaranteed yield in Treasuries to rebuild their own balance sheets.

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Further, 90 percent of all lending to residential real estate is done by Fannie Mae, Freddie Mac and the Federal Housing Administration at this point. Banks are just the originators and servicers of the loans. They’re not really the lenders at all. As we know all too well, these government agencies will keep lending for political reasons even if it means that they generate losses forever.

Another part of the government’s reasoning for supporting residential real-estate prices is that consumers won’t spend if their home equity is falling. Since home-equity loans for most people without excellent credit and income are not available anymore, this reasoning is also wrong. Home equity for consumer spending was only a major contributor to growth when lenders were throwing money at people during the bubble so they could extract it, or they could flip their home at a quick profit because the value was rising so quickly.

In today’s market, distressed consumers would be better off walking away from their home, and many of them have started doing just that. Strategic foreclosures, which involve the borrowers voluntarily giving the property back to the bank, have hit an all-time high. For consumers who aren’t distressed, most of them today would rather keep their debt levels under control than go get a home-equity loan and spend it on vacations, cars or other discretionary items.

The last part of why high home prices are supposed to benefit the economy is that lower prices would kill new construction of homes. This also is not true. New home demand is a function of population growth in certain locations. It was only related to high home prices during the bubble because people were speculating on homes as investments rather than buying them for shelter.

In today’s market, lower home prices would just mean the new homes would be cheaper to build because land prices would be lower. Other than that change – that only negatively impacts local landowners – there would not be a substantial impact on new home construction. Profit margins for builders, which create the incentive for them to build, would remain about the same because the lower land price would offset the lower home price upon sale.

As far as commercial real estate, there is almost no activity at all in that sector because of government policy. Transaction volume is down 90 percent from its peak of 2007.

It is completely frozen because the banks will not write down assets to market value and sell them to investors who know how to manage the properties and invest required new capital in them.

In the commercial real-estate collapse of the early 1990s, regulators forced banks to write down their loans to market and sell them to sophisticated investors who knew how to turn around the assets and create value.

But this time regulators are encouraging banks not to write down loans, to extend them and pretend that the loans are good even though they are not and to avoid selling loans at market value so that they can artificially inflate prices.

This has been disastrous for the commercial real-estate industry because it has destroyed transactional activity and new investment in properties. It has only benefited banks and large commercial-property owners such as real-estate investment trusts and institutional asset managers. The rest of the industry has been destroyed by this government manipulation.

It gets even worse.

By keeping commercial real-estate prices high and ownership in the hands of investors who overpaid for it or their lenders, lease rates for tenants are artificially inflated and capital improvements are artificially reduced. Higher lease rates mean a higher cost burden for businesses, which hurts their profitability and reduces their ability to create jobs or invest in research, development and capital equipment.

Lower capital improvements by landlords mean few construction jobs as well as less functional and less energy-efficient buildings. For retail properties, it also means less appealing environments for consumers to shop and spend money. If the properties were sold at market prices to new investors with a much lower cost basis, both of these issues would be mitigated and the economy would benefit. The only loser would be the current lender and that lender’s partner, the U.S. government.

This brings us to the real reason that the government is so focused on propping up real-estate prices. It has nothing to do with helping the economy or spurring economic growth.

The U.S. government is effectively the owner of last resort for all of the overleveraged real estate in our economy. They have provided a backstop to the big banks and they are on the hook for almost all of the residential loans made in this country. What the government policy is really doing is unrelated to helping the economy.

It is related to preventing further politically embarrassing hundreds of billions of dollars of losses to Fannie, Freddie, FHA, the U.S. Treasury and the Federal Reserve.

Basically, the politicians are covering their own stupid mistakes and stupid policies of guaranteeing all of these real-estate loans with more stupid policies that will further destroy economic growth in the years ahead.

This is what happens when you let politicians and government bureaucrats run an economy and take over the financial system. You get capital allocated for political reasons rather than economic reasons, which leads to the general impoverishment of the entire country.

Didn’t we learn anything at all from the Soviet Union? The Chinese did. They learned that when you have a bad business that loses money and doesn’t create jobs you reallocate capital away from that business regardless of politics. Their economy is booming. Ours is stagnating. Maybe we could learn something from the Chinese and stop propping up real estate.

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