Tuesday, October 7, 2008

Bass ackwards policies on housing

I know I've probably mentioned this before, but reading about another example today made me want to bitch about it again. For reference, the article I read was about how Fannie Mae will now be buying up bad loans from the Federal Home Loan Bank of Chicago. The action is somewhat expected given the recent nationalization of the GSE's, and thus their renewed emphasis on wasting money instead of making money. However, it also emphasizes the utter idiocy of government policy in the housing market.

The FHLB of Chicago nominally exists to provide below-market loans to people to help them afford to buy houses. Now, helping people afford to buy houses is not a bad idea in and of itself. However, this, in a microcosm, was a huge factor which lead to the housing bubble. Let me explain...

When you have subsidized purchases of assets (of any kind, assets or subsidies), and the asset prices are not set by an authority (ie: any free market), the asset prices will rise to compensate for the subsidization. This is especially true if subsidized buyers are competing for a fixed amount of assets with non-subsidized buyers, or only subsidized buyers are buying.

Now let's apply that to the housing market. You have a government entity (Fannie Mae, FHA, FHLB, etc.) offering artificially low rates to "stimulate" housing demand, now that they're not concerned with losing money. This makes it so that borrowers can afford higher loan amounts, which pushes up the price of homes. This makes the homes less affordable for anyone who is not subsidized, who complain that they too need subsidies. As the government expands the subsidy program, house prices continue inflating artificially, and the government is effectively giving money to people who arbitrage houses. Meanwhile, everyone else is being squeezed out of the market, because the prices are artificially high, and very unaffordable, and the original people receiving subsidies still cannot buy anything.

So let's review. The point of the plan was to make housing more affordable. The effects of the plan are:
- Housing is less affordable for everyone
- The government pays people who arbitrage houses
- Nobody is helped afford a house


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