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He Got His Wish

I was just reading an excerpt from Joseph Stiglitz’s The Roaring Nineties. In it, Stiglitz makes his usual argument that market failures are everywhere and that wise government policy can and has stepped in to the rescue. An illustration he uses is that during the 1930s when Fannie Mae was organized by the government, it was done to correct a huge market failure in the mortgage market, he says:

Fannie Mae was created in 1938 to provide mortgages to average Americans, because private mortgage markets were not doing their job. Fannie Mae has resulted both in lower mortgage rates and higher home ownership — which has broader social consequences. Homeowners are more likely to take better care of their houses and also to be more active in the community in which they live.

Four points:

  1. What does it mean to say that private mortgage markets “were not doing their job?” Is there a right job for them to do? Absolutely not. Mortgage markets, like any markets, ought to have open and robust competition and have transparent and flexible pricing and allow consumers and producers to act on that information. Comrade Joe seems to have forgotten basic econ, a bit ironic given he is the author of one the leading Principles textbooks (in fact, it was his text that turned me onto economics as an undergraduate in the first place).
  2. He claims that Fannie resulted in lower mortgage rates. But does he tell us how much, and the economic significance of that? The best research indicates that the combined effect of the housing related GSEs is that they lower consumer borrowing costs by 25 basis points (a quarter of a percent). Is that enough to offset the other higher costs imposed on the country from these looting agencies? Are low interest rates necessarily desirable?
  3. I like how Stiglitz celebrates home ownership as being important. Isn’t he part of the crew making fun of President Bush’s “ownership society” vision? Furthermore, while there are certainly clear benefits to having Americans own their homes, from a labor market flexibility standpoint, and from a transitional standpoint, it is not at all clear that home ownership is a good thing. I own a home in Rochester, and that keeps me much more tethered to the area and my job than I otherwise would prefer to be. Given the confiscatory taxation up here, all else equal, I’d rather be teaching at a private college in Texas or Florida, but the transactions cost of selling a home are much higher than if we were renting. And cannot the high rate of home ownership be at least partly to blame for the current nasty and persistent high rates of unemployment in the US?
  4. He cites the possible benefits in increasing homeownership. But that alone is not justification for government to increase homeownership. As I’ve argued before, most of us could benefit from a long vacation in Europe – we would be happier, more learned and worldly, and be more creative when we returned. But does that mean we should set up Vacation Mae? But the more important point is that ol’ Joe got his wish. We got Fannie and Freddie, and they played a very important role in inflating the housing bubble, certainly between 1998 and 2003, and their behavior was so bad that the taxpayers are already holding the bag for $150 billion and these two monsters still have an open line of credit with the government. Is that what ol’  Joe claims as a raging success? Is that simply the “price” of having to raise home ownership rates to exactly what they are in Canada, who, by the way, has no such entity as Fannie and Freddie, nor do their commercial banks offer exotic mortgages to induce people into homes, and still 2/3 of their households own homes.

Joe got his wish in the housing market. And Joe and his ilk are getting their wish in health care, pensions, retirement, the post office and education too. Unfortunately, the rest of us are the suckers holding the bag.

One Response to “He Got His Wish”

  1. Harry says:

    Market failures were everywhere? Give me a break! And the reason for our escape from oblivion were the interventions of wise men?

    True, the Federal Home Loan Bank did not fail during the depression, and for that reason I had few qualms about recommending to risk-averse clients in 1986 that they buy such securities, for reliable income. Part of my thinking and my line to them was that they had not failed, even back in the depression.

    My argument with Joe centers around his assertion that market failures imply the need for government to control, well, everything.

    This is the same argument that the Pharoah, or the Emperor Caesar, or the feudal king, or King George, or the Kaiser, or Hitler made. We peons are too stupid to make wise choices about how to slice up the pie. Nietzche gave the secular kings the excuse not to have do bother with divine right to impose their will.

    I agree that the big problem today is with defined-benefit pensions. I have heard little about the effect from the effort to undermine our wealth and to redrisbute it has had on the value of those same pension systems, which were flush in the days of Ronald Reagan.

    Suppose our government supported growth. Would not those pension systems not enjoy the fruit?

    In the movie 2001, the apes argue over the waterhole. We watch them kill each other over it. The progressives tell us how bad it is, that we kill each other, and we should share the waterhole.

    I say, go out and find a new waterhole and plant something.

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