Arnold Kling

The Lesson of the Housing Bill

Switzerland... The McCain-Stiglitz Axis...

Think of the following as a diagram:

High Collective Benefits
Low Collective Benefits
Mostly Market MechanismsMostly Government Mechanisms

Along the horizontal axis, as you move to the right, resources are allocated by government mechanisms more than by market mechanisms. Along the vertical axis, as you move up, you go from benefits that are skewed to a few people and toward benefits that are broad-based.

The naive presumption is that there is a strong upward slope in the diagram. After all, in markets, people are selfish, while government is a collective entity.

The Masonomist view is that there is a strong downward slope in the diagram. When two people trade, they both benefit. Rarely is there an adverse effect on a third party that is large enough to outweigh the benefits for the transactors. Moreover, as people compete for business, they are spurred to innovate and improve.

With government mechanisms, it is almost always the case that someone is compelled to do something they otherwise would not do. Unless I were compelled to do so, I would do nothing to help banks that made risky mortgage loans. When there is compulsion, it is more likely that the many are being compelled to benefit the few, rather than the other way around.

Let us look at the housing bill.

First, we can stipulate that the market mechanisms created a mess in the housing market. With hindsight, I am sure that many borrowers, lenders, and investors would have done things differently.

With hindsight, government, too, could have acted differently. Congress and regulators did nothing to curb subprime lending--if anything, pressure was put on Freddie and Fannie to join in.

After the bubble popped, investors lost money and people on Wall Street lost jobs. Nobody in government lost money or lost their job. Instead, they used it as an opportunity to take more power and redistribute more money from innocent taxpayers to favored constituents.

The housing bill typifies the population of the lower right quadrant of the diagram.

Comments and Sharing

CATEGORIES: Political Economy

COMMENTS (4 to date)
E. Barandiaran writes:

It seems that the housing bill benefits the people denounced in this article

shayne writes:

Under the stipulation that the market mechanisms created the housing mess, it did so with full knowledge that the Federal Government and the Federal Reserve have often bailed out the most egregious perpetrators of market errors in the past. It's curious that most of the same voices that were screaming "bail-out" when the Fed orchestrated the JP Morgan/Bear Stearns buyout are now screaming for this legislation - but the "bail-out" phrase is not being uttered.

Am I missing something, or is this legislation designed to re-inflate the housing bubble that we've stipulated was a market failure?

Gary Rogers writes:

I also cannot go along with the statement:

We have been under one program after another since the great depression to stimulate the economy. These programs have continuously depressed savings and provided incentives for spending. For most people, the best way to accumulate any capital in this environment is to invest as much as possible in their home. Agencies like FM and FM helped as did the ability to deduct mortgage interest from taxes. Is it any wonder that when the Fed lowered interest rates in 2001 and left them there for too long that a market bubble formed around housing. I would stipulate that the blame for the housing bubble can be directly placed on years of bad government policy and that the housing bill is more of the same.

Although I see a ray of hope from the GM economists, where are the rest of the economists who are supposed to know how these things work? Is it is any wonder that everyone thinks the government is going in the wrong direction when the fix for consumers that are overextended is to encourage them to spend more? Does it help strengthen the dollar when we continue to pile up debt? Did I miss something in history where a country was able to strengthen its position by maintaining a weak currency and overstimulated consumption? Where is the common sense? Where are the economists?

sneddon writes:

Can we teach your downward sloping graph to kindergarten. Maybe in twenty years we'd have better governments.

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