Housing Crisis

Is it just me or do you also see the huge irony in the government takeover of Fannie Mae and Freddie Mac? This is a Republican administration. One whose mantra has been let the markets be and all will be well. Yet now they step in and nationalize the two largest mortgage lenders in the country. Combined the two accounted for about 70% of all mortgages made during the first part of this year. So, more than just nationalizing Fannie and Freddie, the administration has nationalized the entire mortgage lending industry.

And these are free market Republicans?

Were the Democrats to have done this the thunderous reaction from the right would surely have been to criticize yet another example of socialist style big government. After all it’s quite difficult to get bigger government than taking over the housing industry.

I most particularly get vexed over the quite obvious failure of free market theory that the housing debacle represents. Here we have Ben Bernanke, he of the popular economics text book, stepping in and admitting that the market, whose virtues he extols in the classroom, has signally failed out there in the real world. Oh nasty real world! How dare you intrude in the fantasy of the economics text book. How perfectly rotten of you to butt in and shatter the utopian myths we teach our children! Ah! I hear the neo-classical response already: but the theories we have give us such wonderful insights into the mechanisms of the economy that you, philistine that you are, should not criticize. Text book economics is not about predicting the economy, but rather revealing its inner workings! Really? Well, what inner workings have we revealed in the housing crisis? That a rational response to falling prices – the liquidation of assets before losses accumulate too much – turns out to have negative results: everyone acting rationally produces a glut of assets hitting the market simultaneously thereby driving prices lower even more and resulting in a diminution rather than augmentation of capital. Duh! Those of us not wedded to the perfect world of text books theory have seen that happen before. It leads to deflation on a grander scale. And markets tend to run away in those circumstances and the cumulative behavior is irrational. Hence the need for non-market intervention. For the uninitiated we call this a “market failure”. Such failures are frequent. In fact they are so common that it’s best to say market efficiency is the rarity. Just don’t expect our friend Ben to accept that notion.

So the irony is glaring: the free-marketeers intervene in the market to save it from itself. The cost to the country could be enormous. The taxpayers will be underwriting the housing industry even more than before. The Republicans have long pressed a social policy in housing: that home ownership is a “good thing” and that the government should tilt the economy to bias it towards home ownership. The mortgage interest rate deduction against income taxes is nothing other than a social policy enacted through the tax code. And now nationalization.

How utterly socialist. How utterly Republican to talk one way and act another.