Quantitative Easing Home Equity An Alternative Economic Management Tool

De Koning, Kees (2021): Quantitative Easing Home Equity An Alternative Economic Management Tool.

Abstract

Home equity levels play a key role in the economic experiences of countries. The example of the U.S. situation is very informative. In 2005, the home equity level stood at $14.4 trillion. U.S. government expenditure in the same year was $4.4 trillion. As a consequence of the Great Recession, the combined home equity levels dropped to $8.2 trillion by Q1 2012. This was a not inconsequential loss for many homeowners. By Q3 2020 the level of home equity had risen to $20.4 trillion. The total U.S. home value level rose to $31.2 trillion by Q3 2020. One may compare this to 2020 GDP of $20.924 trillion and more importantly to the share of GDP that flowed to the U.S. government (Federal, State and Local) in 2020 of an estimated amount of $ 7.63 trillion. In 2020, the total home values in the U.S. were just more than 4 times the combined income level of the U.S. Federal, State and Local governments! Even taking away the outstanding housing debt level of $10.2 trillion, the $20.9 trillion home equity level still represents a multiple of 2.74 times of the combined U.S. government tax level in 2020.

There are at least three methods to stimulate an economy:

1. Monetary policy is executed by lowering the short-term interest rates so that savers are encouraged to spend more and borrowers can afford to borrow slightly more than at a higher interest rate level.

2. Fiscal policy works in that a government can borrow more in order to spend above its tax income level. This implies that a debt is created that in future years need to be paid back by all households.

3. There is a potential third option: the Home Equity Policy. A government can encourage home equity to be used on a temporary basis to stimulate the economy. “Re-savings” can be made out of future income levels. The beauty of this system is that it is an individual household’s decision and the benefits of more spending go directly to the household that participates in the scheme. The replenishment of the home equity savings level is totally to the benefit of the individual household.

The aim of all three methods is the same: increase demand levels and lower unemployment levels without accelerating inflation levels. Why method three might prove to be the most effective is explained in this paper.

• Item Type: MPRA Paper
• Language: English
• Keywords: U.S.Home Equity, Great Recession. Economic management tools, U.S. Government debt levels,
• Subjects: D - Microeconomics > D1 - Household Behavior and Family Economics; D - Microeconomics > D1 - Household Behavior and Family Economics > D11 - Consumer Economics: Theory; D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Household Saving; Personal Finance; D - Microeconomics > D5 - General Equilibrium and Disequilibrium; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; D - Microeconomics > D7 - Analysis of Collective Decision-Making; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

U.S. Treasury direct; Outstanding U.S. government debt levels; https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm

Macro trends; Fed Funds Rates historical charts; https://www.macrotrend https://www.macrotrends.net/2015/fed-funds-rate-historical-chart s.net/2015/fed-funds-rate-historical-chart

Federal Reserve; Quantitative Easing activities https://www.federalreserve.gov/econres/feds/quantitative-easing-and-the-quotnew-normalquot-in-monetary-policy.htm

Federal Reserve Bank of St. Louis; unemployment data; https://fred.stlouisfed.org/series/UNEMPLOY/

S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPINSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CSUSHPINSA, February 25, 2021

Federal Reserve; Distribution of household wealth, various years https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#ra

Federal Trade Commission; Reverse mortgages https://www.consumer.ftc.gov/articles/0192-reverse-mortgages