Thursday, February 2, 2012

Obama Mortgage Refinance Plan [White House market intervention-distortion #1,621]

‘President Barack Obama announced a package of proposals designed to jolt the housing market, his latest effort to reignite the economy after four years of foreclosures and falling home prices.

“This housing crisis struck right at the heart of what it means to be middle class in America: our homes,” Obama said in a speech in the Washington suburb of Falls Church, Virginia. “We need to do everything in our power to repair the damage and make responsible families whole.”

The president said his plan would make it easier for homeowners to refinance their mortgages into current low interest rates, which are now below 4 percent. Borrowers, even those who owe more than their homes are worth, would be able to refinance into loans guaranteed by the Federal Housing Administration.

To pay for the program, Obama will ask Congress for a tax on financial companies with more than $50 billion in assets. Congress has refused to act on similar requests twice in the last two years.

“No more red tape, no more runaround from the banks,” Obama said. “A small fee on the largest financial institutions will make sure that it doesn’t add to the deficit.” ’ (1)

Upon further review, the implicit underlying argument of the semi-bailout described above is that the market failed. However, if markets fail, then governments fail too.

Taking the if markets fail, then governments fail too argument to the externality phase, then both markets and government generate externalities. However, the negative externalities [neighborhood effects] associated with markets are often vilified (without regard to positive externalities) ending in a tax and/or regulation. How about government externalities?

Government, more succinctly politicos through the mechanism of government, and public policy, more succinctly politico policy, are always politically framed as only exhibiting positive externalities. Yet once notional politico policy becomes effective, several years hence, cascading unintended consequences occur which are in effect the externalities of politico policy aka government failure e.g. Medicaid, Medicare, social security, the multitude of other Great Society programs, public education K-12 etc., etc.

One needs to examine government failure and associated externalities and the response. Rather than scrapping policy that fails, more policy is instituted to supposedly correct the root policy failure which merely continues to fail.

“Government is the only enterprise on earth that when it fails, it merely does the same thing over again, just bigger.” -Don Luskin, TrendMacro

“I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.” - Milton Friedman

John B. Taylor, Stanford University economist, wrote a book entitled Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis. Within this very short book [82 pages] Taylor makes a very convincing argument that government actions, became government failure and set the stage for financial shenanigans [externalities]. No government intervention, then no government failure, and hence no stage set for shenanigans. (2)

The negative externalities being mortgage loan brokers and other mortgage loan access points that engaged in shenanigans as the stage had been set by government through constant and prolonged interventions into the mortgage loan market. Consequentially, mortgages ended up resulting in ownership of homes, at the margin, by buyers who did not qualify. However, the negative externalities could have never occurred had not the environment been created for such negative externalities by government [politicos through the mechanism of government].

In a nutshell, beginning with the market intervention of the community reinvestment act, the promotion of ownership above historical standards by manipulation of GSE’s [Fannie, Freddie, etc.], government directed lowered loan standards, coupled with the Federal Reserve (government) creating a cheap money bubble 2002-2004 created the stage for shenanigans. That the cascading market interventions cause cascading market distortions.

Coming half full circle, we have politicos through the mechanism of government creating market intervention-distortion, creating government failure, causing negative externalities. No doubt mortgage lenders where involved as they took advantage of the environment created for shenanigans. However, rather than reversing course and ending market intervention-distortion policy, the politico, on queue, advocates more market intervention-distortion - or - “Government is the only enterprise on earth that when it fails, it merely does the same thing over again, just bigger.” -Don Luskin, TrendMacro

Now coming three fourth circle, one must examine the proposition that Markets never clear perfectly. Why? Serially uncorrelated errors. Hence no perfection can occur. The market clearing proposition is that quantity demanded will be in equilibrium with quantity supplied with price as the equaling agent. (3)

Closing the loop, paradoxically, intervention-distortion merely creates an environment that magnifies serially uncorrelated errors. That "imperfection" is the argument for intervention-distortion.... when in fact perfection becomes additional imperfection. (4)

In summary, a market never perfectly clears, but it clears in the most part as price changes to bring quantity demanded into equilibrium with quantity supplied. Hence constant distortions impede equilibrium therefore the market distorts and quantity demanded or quantity supplied, given no perfection, can not come into a dynamic equilibrium. In the case of the current housing market, constant and continuous market intervention distortion will leave the market out of equilibrium and delay market clearing, albeit imperfect.


(1) Obama Plans Assistance for Rentals, Mortgage Refinancing, Bloomberg/Newsweek, 02/01/2012

(2) Getting Off Track, how government actions and interventions caused, prolonged, and worsened the financial crisis, John B. Taylor, 2009.

(3) After Keynesian Macroeconomics, Robert E. Lucas and Thomas J. Sargent.

(4) Ibid

No comments:

Post a Comment