Dan Mitchell article: Biden’s Messed-Up Housing Gambit

Uploaded by on Jul 14, 2007

Biden’s Messed-Up Housing Gambit

Perverse housing subsidies from two corrupt government-created entities, Fannie Mae and Freddie Mac, played a huge role in causing the 2008 financial meltdown.

Yes, bad monetary policy from the Federal Reserveprovided the fuel, but Fannie Mae and Freddie Mac ensured that munch of the excess liquidity would flow into the housing sector.

The ideal response would have been to get rid of Fannie Mae and Freddie Mac, but politicians very rarely do the right thing.

So we got bailouts (Bush’s awful TARP scheme), which was bad enough, but every subsequent president has tried to make a bad situation worse.

Obama tried to expand intervention in the housing sector. Then Trump tried to expand intervention in the housing sector. And now Biden is trying to do the same thing.

The Wall Street Journal opined on a crazy proposal from Biden’s team a few days ago. Here are some excerpts.

Income redistribution is an abiding value of the Biden Administration, and now it wants to spread that to mortgage lending. A new rule will raise mortgage fees for borrowers with good credit to subsidize higher-risk borrowers. Under the rule, which goes into effect May 1, home buyers with a good credit score over 680 will pay about $40 more each month on a $400,000 loan, and upward depending on the size of the loan.Those who make down payments of 20% on their homes will pay the highest fees. Those payments will then be used to subsidize higher-risk borrowers through lower fees. This is the socialization of risk, and it flies against every rational economic model, while encouraging housing market dysfunction and putting taxpayers at risk for higher default rates. …selling people houses they can’t afford has never been a good idea. See the subprime loan collapse of 2008. …the Federal Housing Administration…want[s] to punish those who have maintained good credit while rewarding those who haven’t.

The editors of National Review are similarly disgusted by the Biden Administration’s scheme.

Here are parts of their editorial.

The federal government props up the housing market in too many ways to count. The U.S. is unique among rich countries in having the national government insure mortgages, guarantee mortgage securities, and finance mortgages with government-sponsored enterprises. …When government isn’t getting the results it wanted with all of its previous involvement, it tries a little more intervention to “fix” its previous interventions.To help out homebuyers with poor credit scores, the Federal Housing Finance Agency has decided that homebuyers with good credit scores will pay a little more for their mortgages. …FHFA director Sandra Thompson said the new rules…would “increase pricing support for purchase borrowers limited by income or by wealth.” But income and wealth are and should be limiting factors in lending. It’s not good for borrowers to take on loans that may prove beyond their means to pay back. …this policy reduces the incentive to be responsible…and…has the added twist of penalizing people with high credit scores. …That’s one way to get more poor decisions and fewer good ones.

For all intents and purposes, the Biden Administration wants more redistribution.

That’s not a good idea.

But it’s an especially dumb idea when the additional redistribution is spiced with moral hazard.

P.S. Some of my left-wing friends say the 2008 crisis was caused by “Wall Street greed.” I respond by asking them whether there was greed on Wall Street in the 1980s and 1990s, or at other times. They usually have to admit that greed is always present, so I then tell them greed only becomes a big problem when mixed with upside-down government policies.

P.P.S. We should get rid of Fannie Mae and Freddie Mac and every other version of government intervention in the housing sector. Including the entire Department of Housing and Urban Development.

In his book “Capitalism and Freedom” (1962) Milton Friedman (1912-2006) advocated minimizing the role of government in a free market as a means of creating political and social freedom.

An excerpt from an interview with Phil Donahue in 1979.



On the Phil Donohue Show Milton Friedman noted:

“Well first of all, tell me: Is there some society you know that doesn’t run on greed? You think Russia doesn’t run on greed? You think China doesn’t run on greed? What is greed? Of course, none of us are greedy, it’s only the other fellow who’s greedy. The world runs on individuals pursuing their separate interests. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worse off, worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by the free-enterprise system.”
Milton Friedman

The Economics of Greed

Looking back on the 2008 financial crisis, it seems clear that much of that mess was caused by bad government policy, especially easy money from the Federal Reserve and housing subsidies from Fannie Mae and Freddie Mac.

Many of my left-leaning friends, by contrast, assert that “Wall Street greed” was the real culprit.

I have no problem with the notion that greed plays a role in financial markets, but people on Wall Street presumably were equally greedy in the 1980s and 1990s. So why didn’t we also have financial crises during those decades?

Isn’t it more plausible to think that one-off factorsmay have caused markets to go awry?

I took that trip down Memory Lane because of a rather insipid tweet from my occasional sparringpartner, Robert Reich. He wants his followers to think that inflation is caused by “corporate greed.”

For what it’s worth, I agree that corporations are greedy. I’m sure that they are happy when they can charge more for their products.

But that’s hardly an explanation for today’s inflation.

After all, corporations presumably were greedy back in 2015. And in 2005. And in 1995. So why didn’t we also have high inflation those years as well?

If Reich understood economics, he could have pointed out that today’s inflation was caused by the Federal Reserve and also absolved Biden by explaining that the Fed’s big mistake occurred when Trump was in the White House.

I don’t expect Reich to believe me, so perhaps he’ll listen to Larry Summers, who also served in Bill Clinton’s cabinet.

But I won’t hold my breath.

As Don Boudreaux has explained, Reich is not a big fan of economic rigor and accuracy.

P.S. Reich also blamed antitrust policy, but we have had supposedly “weak antitrust enforcement” since the 1980s. So why did inflation wait until 2021 to appear?

P.P.S. In addition to being wrong about the cause of the 2008 crisis, my left-leaning friends also were wrong about the proper response to the crisis.

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