Government and Home Ownership

I am reading Meltdown by Thomas Woods, an economist of the Austrian school. It is his take on the housing crisis. I am sympathetic to his line of argument.

By chance, I happened upon this piece by David Coates (professor of something called Anglo-American studies at Wake Forest) at the Huffington Post.

Mr. Coates uses the recently published ("long awaited") Treasury Department report on reforming America's housing finance market to lambaste both republicans for having the chutzpah to disagree with the reports main finding (that more rigorous regulations and enforcement are needed in the market) and also the Obama administration for doing nothing to, well, further interfere in the market.

Mr. Coates gives short shrift to the notion that agencies such as Fannie Mae and Freddie Mac and government policies had much to do with causing the "crisis." Apparently the report does so as well, I haven't had a chance to read it yet. Perhaps these intervention exacerbated the situation, but the government certainly didn't cause anything.

Let's go over a few points:

• The Federal Reserve...as pointed out in this editorial in the Wall Street Journal, written as President W was leaving office, the Federal Reserve kept interest rates too low for too long. The created distortions in the market place, signaling to investors that money should be spent on long-range capital investments. Interest rates, when allowed to operate according to market rules, will be lower as more people save money. This increases the market for loanable funds. People are saving for future consumption. Lower interest rates tell industry that since people are saving for future consumption, they should borrow cheaper money to invest in longer-range investments to be able to provide more goods and services in the future.
• Fannie Mae and Freddie Mac...forget, for a moment, collateralized debt obligations, credit-default swaps and "carving up mortgages" you may have heard about. The federal government set up ostensibly private institutions whose sole purpose was to purchase mortgage "debt" from banks in order to free up more money to lend. The age-old accounting equation states that assets must equal liabilities plus owner equity. So mortgages are not debt or liabilities to banks. They are assets. But so is cash. So the banks "trade" one asset for another with these GSEs, "freeing up" more money to lend. A simple supply and demand curve will show that the best way to drive the price of something up is to increase the amount of buyers out there. Buying the mortgages from banks with the explicit goal (mandate) of getting them to lend more money to more people to buy houses pushes up, artificially, the price of houses.

Now things are a bit more complicated than this and I'm certainly not saying that banks have no responsibility in the matter. But as one wag put it, blaming the crisis on greed is like blaming gravity for a plane crash. Too many people were given too much money to buy too many houses. Short- and long-term investment strategies were jumbled up with mixed messages from the deus ex machina of the federal government, spiced up with a dash of moral hazard, because everyone except elected officials and the talking heads at CNBC seemed to know that if (when) the poop hit the oscillator, the government was going to come in and pay the bad actors off.

So it boils down to this: where did the money come from? Bank of America can't print money. Washington Mutual had no control over where interest rates were set. No bank can force another bank to hold a note to free up more cash.

Sorry, Mr. Coates. Federal government policies were responsible for the genesis of the crisis. And as someone who works in the mortgage/real estate business, I can assure you or anyone else there is no problem from lack of regulation. The problem is that there are far too many. Too many, in fact, to make any kind of responsible enforcement completely impractical. Never mind the sticky issues of no regulators going into any of the big banks in certain congressional or senate bishoprics and ruffling any potential donors' feathers (calling Mr. Dodd, Mr. Chris Dodd!).

Stick to "Anglo-American studies," because you don't know jack about markets.