“‘Your mother can’t produce food out of thin air,’ said Hermione. ‘No one can. Food is the first of the five Principal Exceptions to Gamp’s Law . . . It’s impossible to make good food out of nothing! You can Summon it if you know where it is, you can transform it, you can increase the quantity if you’ve already got some . . . ’”
—J.K. Rowling, Harry Potter and the Deathly Hallows
Somehow, I’d rather be watching football.
I covered this idea a couple of weeks ago, but as we wait with bated breath for the President to unveil his “new” proposals for creating jobs—betcha none of them involve him getting government the hell out of the way—I thought we should review some history so we can have it freshly in mind as we listen.
Recall that our current economic troubles began with the collapse of the mortgage and housing markets. Unscrupulous lenders in the subprime market, so the groupthink goes, made unfair loans to prey upon the weak and economically disadvantaged. After all, money is the root of all evil, so it must be that greedy bankers caused the mess. Yes, I’m sure of it.
Not so fast.
Stan Liebowitz actually detailed the history of the housing/mortgage collapse in an article titled “Anatomy of a Train Wreck” that ran in the October 20, 2008 edition of National Review (don’t ask why I still have that issue hanging around). The immediate problem was a sudden ramp up in mortgage defaults, resulting in the crashing of the securities into which these debt instruments had been bundled and sold (the so-called “mortgage-backed derivatives”). But how did we get there?
As Liebowitz explains, as far back as the 1970s, concern—real or otherwise—over housing discrimination led to policies out of the Federal Housing Administration and the Federal Reserve that encouraged, if not compelled, banks to make loans to people who would not have otherwise qualified under traditional underwriting standards. The 1977 Community Reinvestment Act forced banks to do business uniformly across the geography in which they operate, meaning they had to make loans not only in affluent suburbs, but in economically-challenged inner cities. Reporting requirements built into the Home Mortgage Disclosure Act left banks open to scrutiny and public scorn from the press if the data showed racial discrepancies in loan acceptances. By 1993, Liebowitz reports, the Boston Fed had issued new underwriting directives:
“‘Management should be directed to review existing underwriting standards and practices to ensure that they are valid predictors of risk. Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.’”
So, in the name of increasing the number of mortgages given to “non-traditional” customers—read: those who ordinarily couldn’t qualify for them—traditional underwriting standards aimed at ensuring the loans got paid back were to be altered or even ignored.
Thus was born the subprime mortgage market. And it had the desired effect of increasing the number of mortgages. It also led to a sharp increase in real estate speculation, as mortgages were not only easy to get, but could be had for little or no down payment. And the predictable byproduct of this increased demand was a sharp rise in home prices to levels well above their actual value in an unadulterated market. Everyone’s net worth—at least on paper—shot up, and all was good with the world.
The problem is it was all a fiction based on unsound economic fundamentals. There was no market for subprime lending because the people at whom such mortgages were directed couldn’t afford them. Their individual economic circumstances made them bad credit risks. And zero-down loans meant borrowers had effectively no skin in the game, and thus no incentive not simply to walk away from the mortgage if the price of the home asset securing that loan fell. Contrary to popular belief, banks don’t want you to default on your mortgage, and they’re not in the business of foreclosing—foreclosures cost money and eat into profits. Only when the government pushed them into loan markets they otherwise weren’t in did banks began making these higher-risk loans and offering the more “innovative” mortgage products. It was only a matter of time before the defaults started tumbling in, and the glut of foreclosures left more houses on the market than there was demand to absorb them, revealing the run-up in housing prices for the artificial bubble that it was.
What does this have to do with Obama’s speech on jobs, you ask?
The housing/mortgage crisis is a vivid illustration of what happens when government attempts to create a market by edict where no market exists organically. Such creations are artificial, and inherently inefficient. If they were good ideas, the market would have already come into existence naturally. It’s a funny thing about free-market capitalism: with millions of people, each acting in their own best interest, engaging in billions of transaction decisions good ideas—the efficient and desirable—survive and thrive, and bad ideas fail and are discarded.
Interesting how the same people who shriek that evolution—the development of species by billions of trial and error mutations, the best of which survive and the lesser of which die out—is more than just a theory can’t manage to get their minds around this.
We’ve seen the cost of such government efforts to engineer new markets with the disastrous campaign to create “green jobs.” One need look no further than last week’s bankruptcy of Solyndra, the solar panel firm that cashed in some $520+ million in federal jack and still couldn’t make a go of it. The fundamental problem for Solyndra was that in the end there simply wasn’t enough demand to keep prices at levels that would allow Solyndra to compete with government-subsidized Chinese firms and still make a profit; in other words, there is no market for their product.
Ditto electric cars, as witnessed by the Chevy Volt, which has sold a grand total of about 2,000 units since its launch in 2010, despite a $7,500 tax credit for those who purchase one (oh, yeah, and the $50 billion in federal subsidies—er, bailout loans—given to the manufacturer, General Motors, some of which has still not been repaid). The fact is there simply is no market for these products, and if no one wants the widget, the widget-maker has no need to hire anyone. No market, no job.
So keep this in mind as we listen to the President tomorrow, as he almost certain to continue his Sisyphean quest to create jobs simply by spending money we do not have to “invest” in markets that do not exist.
SIDEBAR: I see that a number of Congressional Republicans are planning to skip tomorrow's joint session address. This is a colossal mistake, and it's going to backfire. For one, giving Obama a joint chamber filled with nothing but folks who will give him standing ovations at the end of every sentence is going to make him and his ideas look better than they are. Further, it's petty and childish on the same level as Obama, particularly after he changed the schedule to accommodate Republican complaints. Moreover, I know it's Obama, but he's still the President, and deliberately skipping disrespects the office and is rude to the man. We need to be above this kind of thing, and I fear it's going to waste precious capital with Independents. --RDW
SIDEBAR: I see that a number of Congressional Republicans are planning to skip tomorrow's joint session address. This is a colossal mistake, and it's going to backfire. For one, giving Obama a joint chamber filled with nothing but folks who will give him standing ovations at the end of every sentence is going to make him and his ideas look better than they are. Further, it's petty and childish on the same level as Obama, particularly after he changed the schedule to accommodate Republican complaints. Moreover, I know it's Obama, but he's still the President, and deliberately skipping disrespects the office and is rude to the man. We need to be above this kind of thing, and I fear it's going to waste precious capital with Independents. --RDW
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