Economics Doesn’t Explain the Housing Market Collapse

Economist Peter Schiff writes: “How has the [housing] market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer’s tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac, and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.”

The question is: Why did housing markets artificially inflate in the first place?

Because government passed laws and enacted policies which made it easier for more and more people to buy houses. This included people who could not afford to pay mortgages, at least over the long-run. Because of the buying frenzy created by these government policies, demand for houses went up — along with prices. As demand fell when millions of people (and their lending banks) realized, kind of all at once, that they can’t afford houses after all, well — you know the rest. House prices began their free fall.

As Schiff points out, the free fall may have been even worse without government policies to cushion the fall. To many, this makes the argument for those government policies. But this raises the question: What happens when those policies end? Sooner or later they have to end, don’t they? Or will the government simply keep passing new laws and creating policies on top of old ones that got us into this mess in the first place!?

Nobody has an answer to this question, including the voters themselves. In 2008, voters overwhelmingly rejected any remnants of free-market capitalism and voted in favor of socialist government controls — the more the better. Now, two years later, the voters have spoken in exactly the opposite direction: Stop controlling and messing up the economy. Which is it, people?

Deeper than economics lies another question: What kind of government would want to buy houses for everyone in the first place? That’s the mindset that got us into this mess. What mentality makes such insane government policy possible?

My name for it is: The entitlement mentality. Normally and rationally speaking, an “entitlement” is something that you paid for. “I bought this television set, and I’m entitled to have it work properly.” Or: “I paid for this airline flight to Hawaii, and I’m entitled to get there, more or less, at the time they promise to get me there.” It’s perfectly reasonable to feel entitled about these kinds of things. However, when entitlement gets extended beyond things you already purchased or created to things that have not yet been created or purchased by anyone — then you’ve got trouble. That’s how the housing crisis came about. “I want a house. It’s my share of the American dream. I want it — and I don’t want to wait! Others don’t have to wait. Why should I?”

It’s simply wrong to feel entitled to things you didn’t create. But when the biggest, most powerful government in world history presiding over the most dynamic economy in human history uses its power to honor that neurotic, irrational mentality — well, it’s hard to believe that I even live in such a country, but we all do. In actual practice, it was legislation passed and implemented by Presidents Jimmy Carter and Bill Clinton that started the government rush to compel private lenders to ensure that everyone owns a house. The socialist ideology of these two men is widely known. Less known is the fact that President George W. Bush promoted something called the “ownership society.” By “ownership” you might think Bush, being a “capitalist conservative” meant people buying their own houses with their own money. It turns out this isn’t what he meant.

Bush felt, like Clinton and Carter before him (and Obama after him), that government should make sure that everyone owns a house if they want one. So when people blame the housing crisis and the resulting Great Recession on Bush’s policies, they’re right, although only half-right. The other half of the truth is that socialist policies such as those of Carter, Clinton and Obama are the very ones that Bush was doing his hardest to implement.

Think deeper. Something is wrong with a person — or a society — who actually wants something he didn’t produce or earn. Imagine I gave you a car, not for any reason, but just to be nice and so that I could feel good about myself for being generous. Would you honestly value that car the same way you would if you were required to first compare prices, determine how much of a car payment you could afford, and how worth it was to you to pay a certain amount for a car?

Of course not. If something comes free of charge, it’s too easy to value. Yet this is precisely what government pulled off under the years leading up to the economic disaster that still ensnares us. No, government did not literally give away “free” houses, but it did ‘incentivize’ the marketplace to do something that a rational and free marketplace would never have done: Sold millions of homes to people who could not afford them, and would never have valued them the same way as people who really put thought and intention into buying them the right way.

There’s a lesson in all of this, but not one single political office holder (to my knowledge) has learned it; nor, I’m afraid, have most Americans. The lesson is that ideas have consequences, and the false notion that you’re entitled to a nice life, and nice things in life, just because others around you have them can only lead to destruction and disaster. Unfortunately, since this terrible recession began, we have not only maintained the policies that led to it, we’re now extending those “ownership” and entitlement policies to medical care, Internet connectivity, automobiles, and who knows what else yet to come.

Value doesn’t simply arise from owning something. Value comes from the foresight, self-responsibility, thinking and planning that makes ownership possible. A politician (or any other charlatan) cannot simply wish value into existence. This is the lesson of the housing market collapse. Unless learned, lasting economic recovery will not be possible.