Affordable Porsches

I’ve been looking for a good example to illustrate the poor cause-and-effect thinking that led politicians to push for home ownership by lowering lending standards.  In this post, I pointed out:

They [politicians] thought that home ownership led to responsible behavior.  In reality, responsible behavior leads to home ownership.

Fellow blogger, Speedmaster at The Pretense of Knowledge, provides an excellent analogy to illustrate this:

It would be like noting that nearly everyone with a Porsche was very well-off, then deciding that buying everyone a Porsche with taxpayer money would make us successful.

Arnold Kling asks obvious questions

Thanks to Russ Roberts of Cafe Hayek for the link.

In his post, Matching Narrative to Policy, Arnold Kling, an economist, asks:

— if the problem was that we deregulated too much over the past 20 years, then why doesn’t the bill simply reset regulations to what they were 20 years ago? or 30 years ago?

— if the problem was that house price increases and mortgage leverage got out of hand, then why does government policy continue to try to push mortgage loans with low down payments?

— if the problem is that lenders were exploiting borrowers (which would justify a focus on consumer protection), then why is it that we ended up bailing out the lenders?

Hats off to Kling for asking obvious questions.  I wish I would have thought of those.  These are some of the first questions that journalists should ask.

Buffett and Goldman

I received a link to this write-up about the Berkshire Hathaway shareholders meeting from the Motley Fool:

Buffet defends Goldman? — Philip Durell, Inside Value advisor
I expected Warren Buffett to be on the defensive over the SEC’s civil charge and subsequent Manhattan U.S. Attorney’s Office criminal investigation, both of which accuse Goldman Sachs (NYSE: GS) of fraud. So I was stunned by his response, which I’ve paraphrased below:

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Steve Forbes on the Crisis

In his December 10, 2009 Fact and Comment column, In-Credit-Able, in Forbes Magazine, Steve Forbes clearly communicated several points worth capturing.  Here’s on on the mortgage crisis:

Government-sponsored enterprises Fannie Mae ( FNM news people ) and Freddie Mac ( FRE news people), with their implicit government guarantees, were able to totally dominate the mortgage market. They could borrow cheaply and leverage up on a scale no private company could. When they went bingeing on subprime mortgages, they ended up twisting and then destroying the housing market. The private sector was quite capable of generating players that could have performed Fannie’s and Freddie’s roles. And because they wouldn’t have had Uncle Sam’s moral-hazard safety net, they would have been infinitely more cautious, even with the Fed creating floods of liquidity and the credit rating agencies forgetting their raison d’être. Yet Congress is determined to keep these beasts alive and under government sway. Washington is also taking over the student loan market.

This is not a well understood point.  Having the implicit guarantee of the government short-circuited the prudence that would take place in a free market.  All the bright bulbs that condemn free markets for causing the crisis, don’t seem very bright to me because they not only miss the true cause of the crisis, but they blame the very thing that could have prevented it.  Removing prudence from a free market through a government action will always end badly.

Here’s some clear thinking from Steve on health care:

The prospective government de facto takeover of health care will extend Washington’s reach into the credit markets. Health insurers will be reduced to federal vassals by being forced to offer policies at prices and terms dictated by Washington. As a reward they will have first call on the credit markets, with the same sort of implicit guarantees that once so benefited Fannie and Freddie.

It’s easy to forget, businesses like insurance companies are in business to make a profit for their shareholders.  If they don’t make a profit, there’s nothing forcing them to stay in business.