Saturday, October 22nd, 2016 MST

The government’s role in the housing crisis

The Austrian School is probably best known for its condemnation of government intervention in the marketplace.  Interest rates, for example, should be determined by the supply of money available to be lent and the number of qualified persons seeking to borrow.  But, no, what do we have: Government rules and regulations that require lenders to have loan portfolios based on race, ethnicity and income.  To anyone with two brain cells to rub together, it is obvious that money should be lent on the borrower’s ability to repay the money.


Government mandated (controlled?) lending is only one step at bringing about economic egalitarianism, where all persons share equally in a nation’s resources, regardless of those persons’ contributions to the creation of wealth.  Under egalitarianism, there are no poor, no wealthy.  All are equal.  Egalitarianism is the pipe dream of socialism, which, everywhere it has been tried, has resulted economic ruin.


The old Soviet Union was the greatest attempt – and the greatest failure – of socialists’ dreams.  Red China was another enormous socialistic failure.  To argue which was the largest failure would be splitting hairs.  But the thing to keep in mind is that the economies of both nations were bailed out only when just a small amount of economic freedom was introduced.


Here in this great country, government intervention, in an attempt to bring about egalitarianism (“Everyone’s entitled to own their own home.”), helped bring about the Housing Crisis, one of the worse financial debacles since the Great Depression, which, by the way, was brought on by – guess what? – government intervention.  Read the late Murray Rothbard’s America’s Great Depression for an understanding of the Fed’s role in causing the Great Depression.  (I know that some readers are coming out of their seats screaming that the Fed is privately owned and not “part of the government.”  When the hand is at work, the glove moves.  The Fed and the government are one and the same when it comes to financial matters.)


The Fed, under Alan Greenspan, who now denies any blame for the Housing Crisis, dropped the discount rate to 1%, making money available at artificially low prices.  Coupled with the notion that “Everyone’s entitled to own their own home,” the housing boom took off.  Five-year ARMs were touted (by Greenspan, I distinctly remember) as the way to finance house purchases.  Many ARM loans even gave borrowers below-the-market rates for the first years, thereby increasing the number of “qualified borrowers.”


Now, why didn’t the lenders see that advancing money to such borrowers was risky?   Stupidly, the lenders had bought into the notion that housing prices would rise forever, making the loans “self-liquidating.”  The link below takes you to only one example of how many of those loans were liquidated.


Foreclosure Alley.  Although the clip runs 12 minutes, the first five minutes show the sad results of government intervention in the housing market.