July 24th, 2008
Government, markets and regulation
Problems in the housing markets aren’t usually something that relates to Information Technology. Housing in one market, retail sales another, filmed entertainment yet another, and Information Technology is about protocols and programming languages and computer operating systems and security.
So, perhaps this blog post is just an attempt by this Economics-trained programmer to interject thoughts relating to other areas of interest into his technology-oriented blog. I rationalize otherwise. Economic principles that apply in housing, retail sales, filmed entertainment and Information Technology have universal applicability, even if the micro details can vary considerably due to the nature of the products on offer.
The cover article in the July 19th edition of the Economist discussed mortgage difficulties sweeping the housing market in the United States. Fannie Mae and Freddie Mac, two mortgage companies that, combined, owe or guarantee $5.2 TRILLION worth of debt (just to put that in perspective, America’s GDP in 2007 was a little over twice that, at $11.7 trillion), may need to be bailed out in some fashion. What I found interesting about the article was that the author, in two well-worded paragraphs, described how these two giants were instrumental in the housing bust, thus turning a government attempt to help home buyers into an economic catastrophe in 2008.
Fannie and Freddie were supposed to help Americans buy their own homes, by making the mortgage market work better. But it has been an awful deal for the taxpayer—a Fed economist calculated the implicit debt-guarantee was worth a one-off sum of between $122 billion and $182 billion. Because Fannie and Freddie barely lowered the cost of borrowing, little of this subsidy went towards boosting home ownership. Instead, just over half—about $79 billion—went straight to their shareholders.
Normal financial-services firms should have been dealing in the safe, middle-of-the road mortgages that Fannie and Freddie specialise in. Except that they were crowded out into subprime mortgages. Fannie and Freddie should never have grown so large. Except that they wanted to exploit the margin between the government-guaranteed borrowing costs and the commercial lending income. They should have been stopped by Congress and their regulator. Except that they spent some of their subsidy on a fierce lobbying machine.
That explanation knocked me back in my seat. In other words, a subsidy designed to help Americans better afford their homes (which I think is questionable policy at best, as I can’t figure out why it is in the national interest to encourage housing speculation, something which to my mind would erode any subsidy-related cost reduction) has turned into a means by which two government-sponsored companies enriched themselves by crowding out the private (and unsubsidized) mortgage industry, something they were allowed to do because some of the largesse was spent on lobbyists whose aim was to prevent the regulation which should have come along with such a large government payout.
This should be “Exhibit A” in any attempt to explain the pitfalls associated with government involvement in the economy. Too often, their goals are all wrong (like I said, why would we want to encourage most Americans to go massively into debt), and even when they are right, their progress is often dogged by businesses hoping to game the government system in their own favor.
That being said, I’m hardly a free market extremist. Perhaps I’m unduly influenced by economists such as Hernando de Soto, but I’m a firm believer in the notion that capitalist systems are manufactured creations of government. Granted, they are manufactures that have very specific characteristics, such as respect for property rights, contracts, and other such essentials, but governments role as infrastructure-builder is beyond doubt.
I believe that some of that essential infrastructure includes a ready supply of educated workers (universal education), and I would also argue that it should include decent and universal health care (there really is no excuse for how we manage health care in the United States). Such things improve the efficiency of the capitalist machine, and thus should be considered as normal a part of capitalism as property and contract law.
In other words, capitalism NEEDS the state, but the state also has a nasty tendency to mess up its efficient workings. Quite a love-hate relationship if I ever did see one.
How are the dividing lines drawn? That’s like trying to describe, in facts and figures, what makes a Rembrandt painting beautiful. You have to have an instinct for what works and doesn’t work, as the exact reasoning is often hard to quantify (though at least economics lends itself to more quantifiables than painting).
The first article I ever wrote for ZDNet was titled “Death to Antitrust.” I wouldn’t write such an article today. That doesn’t mean that I think antitrust regulation in all its shapes and colors has its collective heads screwed on straight. It just means I have a better appreciation of the reason it exists, even if I disagree strongly with how people in the field actually implement it.
In the end, government sometimes is the best solution to a bad situation. The Economist advocates nationalizing both Fannie Mae and Freddie Mac. I can’t say I disagree, as the costs of a massive bailout should at least yield the taxpayer something in return. It is worth remembering, though, that the Fannie Mae and Freddie Mac problem was caused by government in the first place. There never should have been any kind of subsidy of the housing market.
The closest parallel to that line of reasoning would be telecommunications (a segment with a long and tortured history of government influence), but it applies just as much information technology. One should hesitate before encouraging companies to curry favor with any particular government entity in defense of “competition.” They are just as likely to create skewed results, a result that makes one wish that government had ignored the space entirely.
John Carroll has delivered his opinion on ZDNet since the last millennium. Since May 2008, he is no longer a Microsoft employee. He is currently working at a unified messaging-related startup. See his full profile and disclosure of his industry affiliations.
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| 07/24/08
