The Housing 'Solution' Is No Solution At All

"I recommend no policy and propose no plan" - Joseph Schumpeter

In his 2008 book, The Ascent of Money, financial historian Niall Ferguson offered up to readers the essential observation that property is "the English-speaking world's favourite game." He went on to point out that "No other facet of financial life has such a hold on the popular imagination."

Despite the fact that the world - and in particular the English-speaking world - is obsessed with housing and home ownership, there still exist economists and money managers who feel that our government needs to stimulate what is already a major fixation. Their wishes, if implemented, would harm the economy while running roughshod over our freedom.

Prominent economist Charles Calomiris seeks federal subsidization of loans for low-income individuals in the U.S. to ease their purchases of homes. Money manager Jonathon Trugman recently proposed in the New York Post that the government use profits from TARP to create new loans "for people facing foreclosure", and reduced payments for individuals facing higher costs on mortgages set to adjust upward.

Not considered by either is how very cruel their suggestions are. And by cruel, it can't be stressed enough that we do the poor and middle class no good turn in subsidizing their ownership desires.

Indeed, while it's an overdone cliché, it's certainly true that we live in a world where capital moves at the speed of light. Put more simply, the investment capital that leads to company and job creation moves to all points in this country very quickly, which means the best economic opportunities are a moving target in terms of location.

Thinking about the above, for the government to subsidize home ownership is for it to lock individuals down to cities and states at a time when they need to be untethered. Trugman bemoans rising levels of joblessness out of one side of his mouth, but in advocating broader homeownership on the backs of hapless taxpayers, he's unwittingly promoting even greater unemployment thanks to the subsidization of individual immobility. Better it would be to get the government out of the housing game altogether, and in the process reduce homeownership in concert with greater individual ability to chase the best work opportunities irrespective of locale.

Trugman, perhaps talking his own book, would also like for Washington to eliminate the income tax "on the interest income portion" of mortgage backed bonds. This would of course drive even more limited capital into loan securities that enable ownership, which is interesting considering Trugman's aforementioned lack of comfort with high levels of unemployment.

Not considered by him is the simple reality that all jobs are the result of delayed consumption morphing into actual investment. If Trugman's plan is realized, even more capital will flow where it's not needed (that the U.S. is awash in homes that no one wants never seems to have occurred to him), and away from the entrepreneurial areas of the economy where jobs are actually created.

Remarkably, Trugman also proposes that the government and taxpayers reduce the payments on mortgages held by Fannie Mae and Freddie Mac. This comes from someone whose trade is money management.

The above is notable because it's apparent that Trugman has forgotten that there are two sides to every trade. What this means is that if debtors are forgiven their debt through the rewrite of contracts, the homeowner may well be stimulated as he presumes, but only insofar as those on the other end of such a rewrite would be depressed. It's shooting fish in a barrel to bring "moral hazard" into this discussion, but if Americans start to believe that all their mistakes will be excused on the backs of others, won't prudence go out in the window altogether?

Calomiris correctly points out that the more leveraged a homebuyer is, the more likely this person is to default. Right so far, but then he proposes rules to ensure that this doesn't happen again. But as he makes clear, leveraged borrowers are bad risks. In that case, rather than more regulations, why not let lenders and borrowers do as they wish, but simply allow both to suffer their mistakes if the borrower defaults? If allowed, markets do a good job of regulating.

The problem with rules set by governments is that when they prove wanting, taxpayers are forced to cover their mistakes. In Trugman's case, he wasn't entirely clear in his Post column, but given his desire to nationalize housing, he's looking for Washington to offer up a way for borrowers to purchase a government guarantee on their mortgages. No doubt already overburdened taxpayers are dying to subsidize the troubles of others. Scarily, Trugman is serious.

Perhaps most important are the freedom implications of what Trugman and Calomiris are proposing. I don't own a home where I live given my choice to rent. In that case, why should renters like me or, other, responsible homeowners be forced by government decree to subsidize the desires of others, not to mention the vain droolings of those in the commentariat?

Homeownership is already a national obsession, the rush to it this decade was a recessionary act in and of itself, so is it then fair to foist more of the same on the millions of individuals who comprise the U.S. economy? Logic says no, and with the Constitution in no way enumerating to the federal government any powers in the area of housing, it's time for the central planners like Trugman, and well-intentioned fixers like Calomiris to leave us be.

Indeed, while it's increasingly said with a hint of irony, we live in what is a free country. As this applies to the purchase of shelter, we as Americans should be free to succeed in our borrowing and loans, and also free to fail. Only then, when natural market forces are allowed to prevail, will proper lending and building practices reveal themselves. In short, the housing "solution" is no government solution at all. Just leave us alone.