Sunday, November 28, 2010

Faith - Markets and Government

For the past couple of days we have been visiting our daughter and her husband and my mother in law and my wife's sister.   Friday night at dinner we had a discussion about the book The Big Short: Inside the Doomsday Machine by Michael Lewis.    From all that I have read and heard, the crisis in the housing market has many fathers.  About a year ago we had dinner with the retired CEO of Bank of America who argued that the mortgage crisis came about because of a series of governmental mis-steps including expansion of the tax free treatment of gains for houses, the expansion of leverage of Fannie and Freddie and the widening of the Community Reinvestment Act.   Obviously there is the rest of the story which involves the development of the synthetic instruments, CDOs and the like, by investment houses.  On that side there are a lot of causes besides making the mortgage market more fluid and less tied to an individual banking institution.  Lewis' book tells the investment side of the story pretty well.  But surprisingly he does not mention the role of members of congress (especially Christopher Dodd and Barney Frank) who frustrated the role of regulators who recognized some of the excesses of the Government Sponsored Entities.   The role of the ratings agencies and the bankers who really did not understand their own instruments are high on Lewis' list but there were also the natural tendency of many in the business world to act in their narrow self interest.

But from the perspective of my sister in law at was an assumption that the blame fell all on the private sector and those "greedy" bankers and insurance types.  In reality it was both.   The problem comes from the interaction of the government and private sector.  This chart from the WSJ shows that as we have gone through TARP and all the other supposed efforts to ameliorate the mortgage problem, the length of the average delay in payment for homes in foreclosure has increased rather dramatically.

I understand that I am perpetually skeptical of the efficacy of governmental action to help in many (or even most areas) - but I am always struck to encounter someone who seems to believe the opposite.  Public Choice Economics teaches us that people do not throw off their self interest when they take roles in government.  To assume self interest in the private sector is assumed - but my surprise is that many do not seem to see that does not change when you move things to the government.

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