The Sanctification of Irresponsible Borrowers
“To bail out or subsidize those companies and individuals who fail, we must tax, and therefore punish, those who succeed.” – Warren Brookes, The Economy In Mind
Yesterday the FDIC in concert with Treasury floated its latest plan to “save” housing with money taken from the private economy. Rather than let markets run their natural course whereby those unable to pay off mortgages would sell that which they can’t afford to the highest bidder, our minders in Washington have crafted a $50 billion program meant to reduce the cost of “troubled” mortgages.
Thomas Sowell once commented that in the politically correct world of today, individuals previously known as “bums” have become “homeless.” In a similar way, Washington will use the money of others to elevate the status of the irresponsible homebuyers to “victims” of troubled mortgages.
We’re told that federal aid is necessary because housing is in “freefall”, and absent mortgage relief, home prices will fall even more. This is pretty impressive considering the same political class eager to shield us from falling prices was not too long ago bemoaning the lack of affordable housing.
Furthermore, the allegedly enervated housing market that has Washington so riled up isn’t doing nearly as badly as some might assume.
Indeed, while various media members and economists regularly wring their hands over a “collapsing” housing market, the fact remains that the broadest measure of home prices, the Office of Housing Enterprise Oversight (Ofheo) index, reveals something quite different.
According to the latest Ofheo report, home prices over the past year have fallen not 48%, but rather a far less significant 4.8 percent. By contrast, over the past year the Dow Jones Industrial Average has fallen 40 percent.
But even if housing had collapsed in the way that equities have, it still wouldn't be wise for the federal government to try and arrest the collapse. Beyond the reality that periods of falling prices represent opportunities which attract capital, the reasons for the government staying out of the way are many.
First off, failure is a teacher, and it is impossible to separate the ability to fail from the ability to succeed. It is thanks to failure that we learn how to prosper, and removal of this essential signal from the marketplace would over time create a broad level of poverty that would eclipse any that results from natural market forces having their way at present.
Secondly, subsidies meant to reverse natural market forces are a major economic retardant. While in a normally functioning economy capital would flow from failed ideas to potentially profitable ones, subsidies meant to make that which is ugly shine keep capital from reaching its most profitable destination.
Think of it this way: the seen in today’s economy is the federal government using taxpayer dollars to stave off the inevitable decline of General Motors. The unseen, however, is a future Google unable to find relatively cheap capital thanks to a government that creates no wealth itself, all the while crowding out tomorrow’s economic champions for capital to redistribute.
Thirdly, as the late Warren Brookes noted, in order for the federal government to aid one set of rent seekers, it must punish those not looking to the government for help. That is so because the federal government is only able to offer capital to those who’ve made bad decisions thanks to the vital few in society working in ways productive. We haven’t reached this point yet, but there will come a time that the responsible and hard working will no longer work and produce so that the federal government can transfer their gains to the irresponsible and lazy.
This is important when we consider housing, because despite all the nonsensical commentary from economists which posits that our economy is reliant on the sector, the basic truth is that housing is merely a consumptive affect of our productive economy. For economists to suggest otherwise is for them to ignore basic economics.
Put simply, in any economy we produce in order to consume. It is because we are productive in our work endeavors that we have gains that enable us to consume in all manner of ways, included in that the purchase of a home. In much the same way that oil had very little market value prior to the creation of the internal combustion engine, so is housing a valued commodity thanks to prior work that made consumption of living space necessary.
Those who doubt this need only walk the streets of New Delhi and Madras looking for houses. Rather than weathering under a collapsing housing market, India quite simply lacks houses due to a level of economic productivity that is still well behind ours.
So in seeking to save the housing market, Washington is unsurprisingly getting the solution backwards. To subsidize irresponsible borrowers on the backs of the productive is for Washington to discourage the very work effort that created the housing market to begin with.
What is still unknown is how long this legal Ponzi scheme will work. At some point Atlas just might shrug. If so, Washington will have “saved” the housing market only to destroy it.