Posted on 07/22/2008 1:58:07 PM PDT by jazusamo
We don't look to arsonists to help put out fires but we do look to politicians to help solve financial crises that they played a major role in creating.
How did the government help create the current financial mess? Let me count the ways.
In addition to federal laws that pressure lenders to lend to people they would not otherwise lend to, and in places where they would otherwise not invest, state and local governments have in various parts of the country so severely restricted building as to lead to skyrocketing housing prices, which in turn have led many people to resort to "creative financing" in order to buy these artificially more expensive homes.
Meanwhile, the Federal Reserve System brought interest rates down to such low levels that "creative financing" with interest-only mortgage loans enabled people to buy houses that they could not otherwise afford.
But there is no free lunch. Interest-only loans do not continue indefinitely. After a few years, such mortgage loans typically require the borrower to begin paying back some of the principal, which means that the monthly mortgage payments will begin to rise.
Since everyone knew that the Federal Reserve System's extremely low interest rates were not going to last forever, much "creative financing" also involved adjustable-rate mortgages, where the interest charged by the lender would rise when interest rates in the economy as a whole rose.
In the housing market, a difference of a couple of percentage points in the interest rate can make a big difference in the monthly mortgage payment.
For someone who buys a house costing half a million dollars— which can be a very small house in many parts of coastal California— the difference between paying 4 percent and 6 percent interest would amount to more than $7,000 a year.
For people who have had to stretch to the limit to buy a house, an increase of $7,000 a year in their mortgage payments can be enough to push them over the edge financially.
In other words, government laws and policies at federal, state and local levels have had the net effect of putting both borrowers and lenders way out on a limb.
Yet, when that limb began to crack, the first reaction in politics and in the media has been to look to government to solve this problem because— as always— it was called the market's fault, the lenders' fault and everybody's fault except those politicians who created this dicey situation in the first place.
Markets often get blamed for conveying a reality that was not created by the market.
For example, the fact that "the poor pay more" for what they buy in stores in low-income neighborhoods is often blamed on those who run these stores, rather than on those who create extra costs through crime, vandalism and riots.
If the store owners were making big profits, the big chain stores would be rushing in to share in the bonanza, instead of avoiding low-income neighborhoods like the plague.
Markets were also blamed for the Great Depression of the 1930s and New Deal politicians were credited with getting us out of it. But increasing numbers of economists and historians have concluded that it was government intervention which prolonged the Great Depression beyond that of other depressions where the government did nothing.
The stock market crash of 1987 was at least as big as the stock market crash in 1929. But, instead of being followed by a Great Depression, the 1987 crash was followed by 20 years of economic growth, with low inflation and low unemployment.
The Reagan administration did nothing in 1987, despite outrage in the media at the government's failure to live up to its responsibility, as seen in liberal quarters. But nothing was apparently what needed to be done, so that markets could adjust.
The last thing politicians can do in an election year is nothing. So we can look for all sorts of "solutions" by politicians of both parties. Like most political solutions, these are likely to make matters worse.
I love Sowell’s articles. They are just superb and enlightening.
All Hail!
We’ll get NO help from Osamabama,McLame or their supporters in fixing world financial crisis in 2008 and beyond. Its like fighting a fire with gasoline. The RINOs and the RATS are responsible for the situation.
Back when we were looking for this house, we were told we could get a loan for $x. I insisted on not getting all we could “afford” yeah, right, a code for how much debt could they get us into.
Found this house for approx 2/3 of what we could pay and now, when I need this the most, the price is absolutely affordable.
If I had to pay 1/3 more, it would have been ...unfortunate.
Actually my harmless little fuzzball would have had to pay 1/3 more for a while, yes?
My conservative nature always purchased less than I could afford which worked well for one who was transferred almost every other year for quite some time. It paid off as I watched peers get in trouble all over the place, and let me retire earlier than most. They on the other hand in trying to look good had to keep working.
then it is not just the government to blame.
It is the political system which favors corporations that invest in government over corporations that invest in capital and technology.
Once again, a devastatingly accurate hit by the good professor.
“It is the political system which favors corporations that invest in government over corporations that invest in capital and technology.”
I believe that has been happening for a long time. In fact, that is part of the problem. The corporation and government interweaving has created the mess we are in today. We are no longer a Republic, and we are becoming economic slaves with our devalued dollars and our life savings being devoured.
The banking business is today about how much can they get the average person into debt so that they can become rich off of selling phony “mark to market” credit swaps sinking the rest of the savers and wise with the same ship. The destruction is coming and the short term business cycle could careless, as long as they get theirs.
As usual ... Right On!
It is most likely logically impossible to have a completely "free market". If we absolutely have to allow X to occur for us to claim a free market, then we necessarily are going to have to prevent someone from buying the right to prevent X from occuring.
Once we admit that a completely free market is impossible, then I believe we need to focus on what we are trying to gain from a free market. If the ultimate goal is to try and maximize efficiency then I think we would want to encourage those activities which increase transparency and limit barriers to entry.
However, those who claim to support free markets believe it is more important to allow businesses to purchase the right to decrease transparency and increase barriers, so long as those transactions are technically legal.
So for example, lots of contracts between private parties that will impact millions of others who are not direct parties to the contract can pay to have the terms of the contract kept secret. Microsoft can make it financial infeasible for Dell to supply computers with non-Windows operating systems. Financial companies can buy up business journalists to provide faulty information to investors, etc.
Supposedly in the long run companies that do these sorts of things will lose out to companies investing their monies in R&D and capital expansion, but when will this long run occur? If it takes longer than a generation, or in some cases longer than a year or two, then it can mean the difference between someone eking out a meager existence or ending up on welfare.
If we are going to have to regulate the financial markets to some extent, then why not regulate them with the goal of maintaining a relatively free market in the short run, rather than expecting imperfect humans to ultimately generate a free market in the long run?
And if we only have control over a section of the financial market, then we can use our political clout through organizations such as the WTO, G8, etc. to get other countries to agree to similar regulations for the good of all.
Simply requiring people to have the money on hand necessary to back up a hedge, or some reasonable percentage such as 50%, is not equivalent to asking for the nationalization of the home mortgage industry.
And yet those who favor the free market have been cheerleaders for the current system which is in fact inexhorably leading us toward a socialist outcome, i.e. Fannie Mae and Freddie Mac becoming government agencies.
In my mind, dumb lenders and dumb borrowers are mostly responsible for the situation. My guess is the dumb lenders thought they wouldn't take big losses if the dumb borrowers defaulted.
You can blame regulators and politicians for hosting the party, but it is the responibility of the guests to know when to stop drinking from the punch bowl..
1. Corporate welfare isn’t capitalism. It’s socialism, wealth transfers.
2. When government (3rd parties) pays for losses, you tend to take more risks. Like ‘drama’? - get govt involved.
3. government = moral hazard
“And yet those who favor the free market have been cheerleaders for the current system which is in fact inexorably leading us toward a socialist outcome, i.e. Fannie Mae and Freddie Mac becoming government agencies.”
I agree. The transparency will not happen in our lifetimes. Too much money is being made at the country’s expense, with the taxpayer paying the bill, probably our children as well.
That is the most disturbing of all. If Freddie and Fannie own 80% of the home mortgages, then we will have the government in charge of housing in this country. That is just plain scary. Our mortgage is with Citibank, partly owned by Arabs now, that is pretty shocking as well. The whole nation has become a “company store.”
And the sheeple don’t know it ... yet.
Yes, we most certainly do. But don't hold your breath waiting.
That goes double for anyone else whose guilty of the same.
Then we don't have equality under the law?
Perhaps corporations form just to socialize risk.
bookmark
I love that line.
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