The Lesson of the Housing Bill
By Arnold Kling
Think of the following as a diagram:
|High Collective Benefits|
|Low Collective Benefits|
|Mostly Market Mechanisms||Mostly Government Mechanisms|
Along the horizontal axis, as you move to the right, resources are allocated by government mechanisms more than by market mechanisms. Along the vertical axis, as you move up, you go from benefits that are skewed to a few people and toward benefits that are broad-based.
The naive presumption is that there is a strong upward slope in the diagram. After all, in markets, people are selfish, while government is a collective entity.
The Masonomist view is that there is a strong downward slope in the diagram. When two people trade, they both benefit. Rarely is there an adverse effect on a third party that is large enough to outweigh the benefits for the transactors. Moreover, as people compete for business, they are spurred to innovate and improve.
With government mechanisms, it is almost always the case that someone is compelled to do something they otherwise would not do. Unless I were compelled to do so, I would do nothing to help banks that made risky mortgage loans. When there is compulsion, it is more likely that the many are being compelled to benefit the few, rather than the other way around.
Let us look at the housing bill.
First, we can stipulate that the market mechanisms created a mess in the housing market. With hindsight, I am sure that many borrowers, lenders, and investors would have done things differently.
With hindsight, government, too, could have acted differently. Congress and regulators did nothing to curb subprime lending–if anything, pressure was put on Freddie and Fannie to join in.
After the bubble popped, investors lost money and people on Wall Street lost jobs. Nobody in government lost money or lost their job. Instead, they used it as an opportunity to take more power and redistribute more money from innocent taxpayers to favored constituents.
The housing bill typifies the population of the lower right quadrant of the diagram.