Friday, February 22, 2008

Government Regulation Gone Amuck, Example No. 8: Real Estate Bailouts

In this New York Times article by Edmund L. Andrews and Louis Uchitelle, we find the latest example of government regulation and/or intervention running amuck. The real estate market has collapsed and the legislators have noted that voters are hurting--once again.

It happens a lot, only in different domains. Politicians love it, because each episode represents an opportunity for them to look like they're "doing something."


[I highly recommend the Schalkenbach Foundation and this magazine article about what they had already labeled in 2006 as the "coming real estate crisis." Click on the image for their website.]

Crises like this one hark us back to the 1930s efforts of Herbert Hoover to "stiffen public confidence" through the National Credit Corporation and subsequently the War Finance Corporation, and to the 1990s bailout of the savings and loans. Today, the government is once again considering similar action.

We should all become suspicious, however, when the ones making the loudest noise are special interests and politicians. Here are five examples:

1. "Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans."

2. "The Federal Housing Administration [...] is examining ways to expand its new insurance program, known as FHA Secure, to help people replace their costly subprime mortgages with federally guaranteed fixed-rate mortgages."

3. "Credit Suisse executives said they have held lengthy meetings with F.H.A. officials and have urged the agency to relax rules that currently disqualify many borrowers."

4. "An aide to [House Representative] Mr. [Barney] Frank said his [new] bill would, among other things, allow the government to buy up at least some troubled mortgages."

5. "John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies, [has another plan to] create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home. It would take the remainder of the mortgage as a 'negative amortization certificate,' a lien that the investor could recoup if the house were later sold for its original mortgage value or higher."

(As an aside, does anyone stop to consider what effect these liens will have on the purchase price of houses?)

"In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the F.H.A. 'It isn’t a bailout,' Mr. Reich said. 'It is a market-driven solution.'"

Since when is the Federal Housing Authority not forced to do what the government bids it to do, even against management's better market judgment? Thus, how can FHA loan leniency or intervention be a "market-driven solution"?

No one mentions that the special banking interests, including the above-mentioned Bank of America and Credit Suisse (not even an American bank--why should we bail them out?), made some very bad decisions over the past ten years. But this doesn't keep them from whining for government handouts.

Here's an example of the misleading reasons given for all of this renewed hyperactivity:

"The $168 billion federal stimulus package is likely to be less effective than intended because many homeowners may simply use their government checks to pay down their debts."

(Heaven forbid that they should pay down their debts.)

Does this mean, then, that even the stimulus package won't work? Why am I not surprised? It's what economists call a "Keynesian" effort that will just put the nation further in debt. (Keynes was an early 20th century economist who thought that the Great Depression was caused by abnormal lack of consumer spending, and that it had to be spiked to function, like a lazy nag. Most economists today realize that (1) this was not true at the time and is still not true today, and (2) it's an ineffective and even counterproductive way of trying to improve the economy, borrowing as it does from Peter to pay Paul.)

And finally, here is an example of government misuse of statistics to back up all this frenzy:

"Housing prices in Memphis fell by 2.5 percent last year, only the second decline since records began to be kept in 1968, and by far the largest dip, according to Chandler Reports, which gathers this data for Greater Memphis."

What is missing, of course, is the data that points out the 230% percent rise in home prices that took place in the eight years preceding this housing bust. (Chart.) That's an increase of more than 16 percent a year.

But when home prices go up, nobody complains on behalf of home buyers for some reason, perhaps because everyone thinks he's making money. Well, the party's over, folks.

If you read to the end of the article, you'll see more reasons why government bailouts are a bad idea. The examples chosen incite no pity in me; how about you?

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