Saturday, February 20, 2010

Housing and Bailouts

I work a lot with finance.  One of the primary issues which has faced finance in the last year, of course, were the bank bailouts, opposed by just about everyone except the people who matter.  Let's face it, no one likes it when tax money goes to corporations who lost massive amounts of money.  If any case can be made that big business and big government are not always diametrically opposed, the anecdote to prove it would be the Wall St. bailouts.  Much of the time, bigger government means bigger profits for bigger corporations, as I have written about elsewhere.

Much has been made, though of figuring out the "source" of the crisis that triggered the bailouts.  Liberals say that the "source" of the bailouts is the failure of the big banks to value long term over short term profits, the expansion of banking into non-loan business such as derivatives, securities, etc, and predatory lending by banks.  Conservatives typically pin the blame on the Community Reinvestment Act, which encouraged banks to make loans to subprime borrowers. 

The real source of the bailouts is closer to the conservative side; it is government intervention into the housing markets.  The CRA certainly played a role in encouraging bad loans to be given out.  But the U.S. housing market has government fingerprints all over it.  Mortgage interest is tax deductible.  Fannie Mae and Freddie Mac provide a secondary mortgage market, with nearly explicit government backing.  Defaulted debtors cannot be pursued by lenders in many states.  And the federal reserve's monetary policy kept interest rates extremely low for years, encouraging malinvestment in all markets.  Since housing has been subsidized and favored in the tax code for years, more investment took place in this market than in others.  And consistently low interest rates only fueled the unrealistic prices seen in the housing market.  Further, since housing had so much government backing, banks invested big money in mortgage backed securities since they were thought to be a "sure thing". 

Unfortunately, that which can't continue, won't.  And government can only prop up a house of pricing cards so long before reality causes the house to collapse.  And since banks had so much of their assets in mortgage backed securities, when the prices fell, the banks lost money hands over fist. 

To compound problems, the government thought it would be a good idea to get even more involved and housing and banking by bailing out banks, passing a first time home owner tax credit, trying to pass "consumer financial protection" legislation (let's have a consumer government protection agency...), first time homebuyer tax credits, and counting.  Government should get out of banking, and get out of bailouts.  Stop subsidizing and interfering with the market.  Real people get hurt when they get involved.  And the worst thing they can do is to interfere even worse when the problems they create get out of control.  As usual, the proposed solution for government created problems is more government.  It's a brutal cycle.

1 comment:

  1. the bailouts were a large redistribution of wealth, and this "financial crisis" was caused, as you well know, by the fact that the federal reserve prints fiat money out of thin air, and then loans that money to the government at interest, and the only way for the government to pay back that money is with taxes. the government loaned corporations and banks our money, and now we have to pay it back. unbelievable.