Sunday, January 25, 2009

Big Government's Big Effects

Many big government programs are really destructive, but usually, such results are not on any explicit balance sheet or income statement. Thus, busing kids in cities to alleviate segregation, or build giant public housing that is more generous to single mothers than those with husbands, or create a Ponzi scheme in social insurance, have engendered profoundly bad results for the very people that were supposed to be helped. Nonetheless, current recipients of the aid all like their aid, just as any wayward kid appreciates his current enablers.

With all the gushing about Obama, and how he might spend this $1 trillion dollars in TARP and fiscal stimulus, such numbers are so large they stagger the mind. They numb anyone from applying any real discipline, because almost every state, industry, could get by another year with a mere $10B, which in the scheme of $1 trillion is nothing. And via the multiplier, every state or industry implies you are saving X million jobs.

To see the problems, note that for the past 15 years, every bank merger would have to by approved by regulators, who were keen on making sure these banks were making adequate recompense for red-lining and other policies. Thus, consider this press release from when Washington Mutual acquired Dime bank in 2001:

In connection with its merger with Dime, Washington Mutual recently established a ten-year, $375 billion community commitment which targets funding to low- and moderate-income borrowers, and minority borrowers, as well as direct investments and other forms of support in communities where the company operates, including the greater metropolitan New York area. One of the largest community commitments of its kind, the ten-year pledge will be implemented with the assistance and support of a variety of non-profit community partners.

Now, WaMu hade about $250B in assets at this time. Pledging $375B for low-income borrowers staggers the imagination. If the entire banking sector was making these pledges, how, possibly, could one actually meet this objective without creating a huge system of favors, with vested interests at every level (government, business, nonprofit, regulatory, academic)? More importantly, how could it not end in a huge number of bad loans? That it took so long to implode is the most amazing thing. When it finally blew up, those responsible for the mess would say, like "it was perverse that Freddie Mac and Fannie Mae, the two biggest providers of money for U.S. home loans, have been encouraged to put people into homes that they end up losing." That was Richard Syron, who was head of the Boston Fed when it 'proved' that existing residential lending was discriminatory and too conservative back in 1992, and was rewarded as head of Fannie Mae, where he pocketed $38MM for running it into the ground.

I suspect that with this kind of money flowing out of Washington, we are creating a vast, dysfunctional patronage system that will create a nightmare of make-work jobs that will be around until I'm dead. You just can't increase spending by this much, top down, in an efficient manner.


Anonymous said...

here we go again with the minorities issue, whatchamacallit? the narrative fallacy? there was no exact cause for the bust. it would have happened anyway. if anything, there was a confluence of events, most of them independent of what was going on within the US borders.

i agree subsidizing loans was a bad idea but on the basis of sound economics, what we discussed a few posts prior, not as a fuse to the bust. i'll say it again, look outside. there are markets that would make US look dull. i can argue the EU extension in 2004 makes for a better tipping point than your $400bln in loans in the US. it's a small place now. people talk. they get bloomberg in papua guinea now i bet.

and falken, let the commoners get some of the pie too. if that means $2T in bad loans and dole, so be it. all non-tradables shot up not just housing. look at healthcare, education etc. just overflow valves since the capital got all the trade gains.

now we know. at the next trade event of this scale, when we make contact with the aliens, load up on mansions.

Anonymous said...

Eric, You're interpreting their PR spin the wrong way; their goal was not to promote home ownership. What they were really saying was: "We believe we can make more money serving the niche market of people with bad or undocumented credit. Sure, they will default more. But we're we're charging a higher interest rate, will package the loans and pass them on to other people, and for the amount we keep on our books we have priced that risk in."

Steve Sailer said...

I've finally figured out the main mechanism by which the Community Reinvestment Act worsened the mortgage meltdown.

Say there are two banks, Imprudent Inc. and PrudentCorp, interested in buying Third Bank. Imprudent's big strategy is to pour hundreds of billions into subprime pay option mortgages in minority neighborhoods. Prudent's big strategy is to not do that. ACORN and the federal government team up to give the two bidders for the third bank the hint that to get approval to buy Third Bank, they'll need to commit $375 billion in lending to low income and minority borrowers.

Imprudent Inc. replies, "Well, $375 billion is a bit of a stretch, but we were already planning to loan them almost that much, so we'll do it!"

PrudentCorp replies to the feds/ACORN, "Are you crazy? The FDIC would probably have to bail us out. If that's the condition, Imprudent Inc. can have Third Bank."

Repeat again and again, and the CRA's favoritism in acquisitions toward imprudent banks meant that imprudent bankers -- specifically, imprudent bankers eager to lend to low income and minority borrowers with dubious credit -- completed more acquisitions and thus artificially grabbed a larger share of the market.