A Consensus to Question
By Arnold Kling
the main message from the big conference on Fannie and Freddie is that there’s a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines.
Old consensus: we need Freddie and Fannie in order to make housing “affordable.”
New consensus: we need them in order to “prevent further house price declines,” in other words, to make housing less affordable.
I have to question this consensus. It reminds me of the consensus that “We should someday deregulate oil prices, but not now” that prevailed in the late 1970’s. President Reagan rejected that consensus, ripped off the Band-aid of oil price controls as soon as he took office, and the consensus now is that he was right to do so. I have been arguing since early in this crisis that we need a similar approach in housing.
Markets achieve a spontaneous order. The opposite of order is disorder. Price controls in the oil market created disorder, to the point where fights broke out in lines at gas stations.
Government interference in housing markets, which helped produce the disorder known as the financial crisis, is still producing disorder. When houses are “owned” only because the government is supplying lenient, subsidized credit, that is disorder. Given this disorder, rational people do not wish to buy. The rational person wants to buy low, sell high, not buy when the market is rigged to try to keep prices higher than they should be.
The effort to prop up home prices does the following:
1. Diverts capital from other uses.
2. Uses up taxpayer money that could be spent on other things.
3. Increases the wealth of people who find suckers to buy their houses at too-high prices.
4. Decreases the wealth of the suckers who buy now.
5. Decreases the liquidity and mobility of people who cannot find rational buyers for their houses because rational buyers do not buy into a rigged market.
6. Decreases the investment opportunities for rational buyers, who are unable to buy homes in an un-rigged market.
The only thing on this list that even looks like a benefit is (3). The consensus that this policy is necessary has to be questioned and challenged until somebody like Reagan comes along and stops it.