It is widely acknowledged that part of the problem that caused the housing crisis and its troubling consequences is that lenders were pressured by politicians to loan money to people that in normal circumstances would be turned away. The ideological principle behind this pressure was the idea that homeownership was an entitlement, not a privilege; a human right, not something to be earned. While visions of utopia include shelter for everyone (Micah 4:4), they also include a world of peace and no war. The sad reality is that guns are needed to protect the butter if the supply of butter is to ever enlarge. Investment in the means of butter production require borrowing, and borrowers need to pay back their lenders. If you can’t pay back the lender you will have to learn how to be content with plain toast.
Thomas Sowell is critical of congress along these same rational lines. With the facts showing that Fannie Mae and Freddie Mac were encouraged to do more to help the subprime loan market, our political leaders were pushing for loans to be given to those normally deemed unworthy of them. Altruism goes over better with the voter than siding with banks, obviously, though common sense does not always rule. Sowell writes, “The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously.” He could not be more painfully correct.
But the idea of “affordable housing” could not be taken off the table so easily. And if the largest lenders in the game are backed by the American tax payer whose to stop the bankroll of such risky business? Sowell acknowledges that the government doesn’t guarantee Fannie Mae or Freddie Mac, but it is widely assumed that bedfellows bail out bedfellows. The free market would never allow it, and it would never allow such foolishness with loans to transpire. But Fannie and Freddie are neither of the free market nor the product of economic wisdom. Their abominable practices are the consequence of government policy that rests on the nebulous ideals of political ideology. The free market would not supply something that could not be returned, but that is precisely how government economics seem to work.
Nevertheless, something must be done. My opinion is that nothing should be bailed out via blank government check. Take the $700 billion and issue bonds with a low fixed rate of interest. The rate of inflation will most likely make them cheap, but the money isn’t simply given away for free. Make Wall Street pay for its mistakes, but don’t put it out of business. Give the American tax payer something back rather than false ideologies or dubious demands for entitlement. Give us a market that has some freedom to work itself back into real output and economic growth.