The Seduction of Socialism in the US. Another Look at the Subprime Mess
And when I say "Socialism", I'm not talking about the loose and overly applied generic version of the term that gets used...incorrectly I might add...to refer to any redistributive government action in the name of social welfare or justice. No, I'm talking about the economic system definition of the term which refers to centrally planned or administered market action in which the state and not individual and independent market participants dictate prices and, hence, the allocation of resources.
Luckily, this doesn't really happen in this country with most things. And we take this for granted. We really do and it's sad. Also luckily, despite what many conservatives would have people believe, most people on the Left are not really calling for Socialism in a general sense.
Do people on the Left really want the government to:
-set wage rates for different jobs? No.
-set prices for all goods? No.
-control and literally dictate the distribution and allocation of resources? No.
-tell businesses what to charge and where to order supplies from and at what price? No.
How's about a publicly owned and administered restaurant food consumption enterprise that offers to buy up extra food so restaurants never have to throw anything away? Hmmm, I like that one. ;) I'll make me and my food suppliers A LOT OF MONEY. Come to think of it, so will other restauranteurs.
Any takers? I didn't think so. Oh well, there goes my socialized boondoggle in the name of "preventing waste". Hehehe...gotta love the irony. But hey, we wouldn't need to worry about prices being bid up into the stratosphere by restaurants. We could just have the government set the prices on everything and then nationalize all the commodities when it doesn't work and we get shortages and black market selling. It's OK. They'll just blame the black market for bidding up the price by buying all the excess and causing the shortage...
Now why can't other economic phenomena along these command/control/dictate lines bombard the senses as being so equally silly and destructive?
Consider James Dorn taking yet another look at the subprime mess:
When the US Congress created Fannie Mae and Freddie Mac, the two giant mortgage-financing companies, and gave them the status of "government-sponsored enterprises", the stage was set for a major moral hazard problem.
By creating for-profit joint stock companies, with an implicit guarantee that Washington would step in if they were in distress, the two enterprises were able to raise funds more cheaply than their rivals and securitise vast pools of home mortgages....
Mix in some arbitrary, centrally administered prices for credit (Federal Reserve) and you get a toxic brew ready to burst under the right conditions.
And that's exactly what happened.
The lesson is that, when government pollutes capital markets by implicitly guaranteeing debt, market participants recognise that they will be protected if the enterprises run into difficulty. That is why foreign investors, including the People's Bank of China, hold more than US$1.3 trillion of Fannie and Freddie bonds.
In a global financial system, moral hazard means that by socialising risk in a particular sector, overall financial risk increases. Instead of concentrating risk on owners and investors, a government safety net socialises capital markets, allowing errors of judgment to accumulate while profits are being made. When the asset price bubble bursts, the safety net falls onto taxpayers.
The subprime crisis is, at its base, a crisis of markets tainted by government intervention, along with the failure of the Fed to tighten monetary policy. It is also a failure of regulation to effectively monitor lending practices in the subprime market.
It is ironic that the Basel capital adequacy requirements, which were supposed to prevent excessive risk-taking, helped create the demand for securitising home mortgages and creating collateralised debt obligations. Often, well-intended regulations have unintended consequences. That is why it is essential to get the institutions and incentives right from the start and let competitive.
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Comments :
I don't disagree
The GSE's are inherently unstable because of the reasons you say. They will always have these problems. Reich makes an argument along the same lines as mine in a recent column
. Privatized profits with socialized risks never work out too well.
The way to fix it is to cut them loose or completely nationalize them. I know what side you're on, but I'd have to be convinced either way. I don't know enough about housing market or the securitization of mortgages or of the roles that these GSEs play to be able to speak intelligently on the issue.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
I think it's perfectly legit
that government decides it has an interest in promoting home ownership. People owning their own houses gives them more of a stake in the community, it's good for societal stability. In a normal market it also gives people their own safety net since their house will increase in value and they can always sell it if necessary.
Tax breaks and incentives seem like a better way to accomplish this goal, however, and we already have a lot of those.
Weren't there also some issues with mismanagement at Fannie Mae? I seem to recall reading something a while ago, before the current mess... anyone remember?
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
why should houses increase in value?
I think it more directly provides a safety net by providing one of the necessities of life (shelter).
But anyway, why should house prices appreciate (in the absence of improvements)? It seems that the "interest" from this investment is the housing itself, and the capital (the real estate) should be expected to depreciate, if anything.
The only reason I would expect real estate to regularly appreciate is in reflection of the growing wealth of society as a whole -- more money is chasing around a limited amount of land. The value of the building should not increase as long as the inputs to its production (labor, materials) don't increase.
With that in mind, it's kinda funny how housing prices are dropping even as the cost of housing materials is shooting up with all the other commodities.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Yes, it does seem to be the land
that drives the increase, although old houses do have a certain charm that some people will pay more to have.
More $$ and also more people, I guess -- the US has a reasonably high rate of population growth.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
are houses a risky investment?
First, I found some info about historical house prices
(back to 1987). Real prices were pretty flat from 87-99, then we started on this silly bubble.
Anyway, on thinking about this some more, I think that houses might be considered an unnecessarily risky investment, and their promoting their ownership would be a bad way of providing citizens with liquid assets that could be used to cover necessities other than housing.
Aside from the general trend of increasing house prices (probably due to land) there is always the possibility that housing prices will drop across the nation (as we're seeing today). Even greater is the risk that local housing markets will tank -- for example due to poor local government, the immigration of "undesirable" people, or problems in the local economy (such as the local factory shutting down). Given these risks, why should a person rely on their home to be their biggest investment? Why should our financial decisions be dictated by where we want to live? If we're really interested in getting the greatest return on our investment with minimal risk, we should be using the financial markets -- not our personal housing.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
are housing bubbles to be expected?
Thinking about this some more, I would actually expect housing bubbles to occur in rapidly growing areas, due to how long it takes to build new houses.
If you have a rapid increase in demand for housing (the houses themselves), this should push up prices, stimulating more construction. Depending on the difficulty facing developers (e.g. ramping up production, finding suitable lots for developemnt) the supply could lag behind demand for several years -- creating a period in which housing prices are unusually high, but will be expected to come down as supply and demand become more balanced.
Another reason we shouldn't be relying on our houses for financial security.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
I don't know about in general
but in my area there is a demand for housing, and I've seen entire developments go up in less than a year. There may well be behind-the-scenes stuff that takes significant additional time, or this might be atypical, but it seems like the actual construction of houses doesn't take very long these days.
If people purchase houses with the expectation that they will live in them over decades these short bubbles should even out, I would think. Still, you've got to be right that timing makes a difference to how much a house costs, and thus to the overall net gain (or otherwise) in the investment.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
constraints on development
I'm no expert on this, but I was thinking of a few general issues that need to be resolved before actually building:
I expect this stuff varies from region to region. For some of the sprawling cities, developers just buy out a farm and are on their way (assuming that there's a interstate exit in the area). However, for confined cities (San Francisco, Manhattan) large undeveloped areas a lot harder to find, and are often is inaccessible from the city center--so I expect developers to have a much harder time getting stuff together. They probably put a lot more effort into finding old houses or apartment buildings that they can buy up, which I expect can be very slow and costly (unless they convince the city council to use emminent domain).
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
I didn't mean to suggest that was the primary reason
that people should purchase homes, just that it was a nice secondary effect of owning a home.
There are risks to putting $$ in the financial markets too -- it's not like stocks have done so hot over the last year either.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
The idea that houses are an
The idea that houses are an investment rather than a place to keep your junk is one of the reasons the poor get priced out of the market. If a well-off person can afford to buy a house for a bit more than you, he can always buy it and then rent it out to you. And usually, (at least around here) rent will cover your monthly mortgage payment. This goes double for those who own a duplex or multi-family dwelling.
The housing markets tend to be fickle enough that a good profit can be made by sitting on properties and waiting until an upturn occurs. In my current town, there are approximately 240 houses that are vacant. This is in a town of about 25,000. On my city block alone there are at least 3 vacant houses. And several more a few more blocks down. Sandusky also happens to be a renters' town. Not good for the local economy.
I like the UK's squatter laws
. If we had them here, I think we'd have a lot less vacancies. In general, I don't have a problem with anyone using anyone else's property so long as the owner isn't using it. This goes along with my support of use rights. Of course, it's a lost cause because of the very strong history of property rights we have...and because we're nowhere near ready for anarchism.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
Why vacant?
And why don't the owners in the UK just charge a lowish rent and at least get something while they sit on the building?
Are the costs of renting really very high for the landlord?
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Depressed economic conditions
The buildings are vacant for several reasons. A really easy one is that there simply aren't enough people in town.
Sandusky's population has consistently fallen for quite awhile. This is mostly due to the commercial areas being outside of the city proper in Perkins Township. There is a history of bad blood between in-towners and those that live in Perkins because after the Sandusky mall was built in Perkins, the city proper lost quite a bit of its businesses. Old Downtown is littered with vacant commercial properties** because everyone goes out to Perkins to shop. There is also the soft racism of white flight from Sandusky to Perkins. Sandusky is the lone city in the area with any sizable Black population (due to the fact that Sandusky was a stop on the underground railroad for slaves on their way to Canada).
Another is simply because a good deal of the houses are not up to code and to repair them is out of the question. I live in the historic district. The duplex I rent is 108 years old. My "back-door" neighbor (I don't have a back yard; the lot is directly adjacent to another lot on another street) has a house that is 172 years old. I wouldn't be surprised if most of the houses on my block are over 100 years old. Many are in serious states of disrepair. Investors don't care to speculate because no one wants to live in town anymore; Perkins is where the money is, and the current owners aren't willing or able to make repairs to make the places livable.
**Obama was nice enough to put his local campaign office in Old Downtown. I'd give him more credit, but he did put it in the one area where there is some activity, right on the lake shore.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
well put, Adam
That's because the housing prices were not real to begin with. They were inflated by false demand and their value was a mirage. Now we have a surplus of houses whose value is still being preventing from finding its true level.
We have a kind of paradox going on between the cost of building and value of homes.
Makes you wonder
You'd have thought all these speculators would have notice that this was indeed a bubble. Looks like the market was wrong on this one.
Will you blame this on government intervention (outside of low interest rates) or did the market just get this one wrong?
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
I see no reason to go there...
I see what you're trying to get at but your statement would seem to imply that markets and people aren't infallible.
You're adding the idea of "getting it right or wrong" in prognosticating sense to the mix as if that's part of the function. It isn't.
Not only that but you are talking about speculators as if this is all about speculators. It isn't.
Markets operate on the signals given from prices which influence demand and supply and on and on and on.
When the signals are wrong, things go wrong. It's that simple.
And people were looking to buy houses. Lotsa people. These are not speculators as you mean them. They are consumers hedging their bets on increased values and low interest rates to help them take the bet.
Then, enveloped around all this, is the human element of wanting gain and using what's available to get it.
The point of the article if you've read it, is that Freddie and Fannie create risk problems because they allow firms to have it both ways and pass off the risk to a socialized safety net that risks insolvency if it can't sustain drops in value.
Let me rephrase then
Ah, so we know you don't believe in market infallibility. Its good to know you don't treat capitalism as some do -- a religion.
I suppose what I'm essentially driving at is "why the bubble?". Government intervention in terms of Fannie/Freddie? Irrational exuberance? Neither? Both?
I quite obviously read the article since I address that point in the very first comment
. Having it both ways is the problem. You'd have to convince me which is better: socialized losses and socialized profits or privatized losses and privatized profits. I'd usually opt for the latter, but I don't know enough about securitization of mortgages or the functions of the GSEs to say for certain.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
Come on now...
Why do that? You combine two strawmen into one. Doesn't help.
OK.
As for convincing you as to which is better. I really can't do that.
What?
Some people do believe in the market much as people believe in God. This is documented. I'm glad that you aren't one of them.
That's unfortunate. Usually you are the economic go-to-guy.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
Well,
I think that perception is a bit overdone and it is also the product of the anti-market rhetoric it is countering.
It's not that market is infallible. It's the market is usually better than the alternative. There's a difference. That's what I see anyway....not that the market is infallible.
Regardless of what title you give me, it's the kinda stuff you see and understand based on your foundations. You don't need me to convince you. Just look into it.
Meh
I was hoping for the cliffs' notes version.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
No can do
I've pretty much given a cliff notes of cliff notes version here and there. That should be enough to at least get people to look further into if they wish.
tax breaks and incentives for home ownership
Yes, we do have a number of them. Given that fact, it seems unnecessarily redundant to have these subsidized mortgage companies.
I'd prefer all of these subsidies to be distributed on the demand side (the home buyer), but Freddie Mae and Fannie Mac are supply side interventions in the market. While the GSEs don't fit my ideals, they do represent a winning combination in real politics: they benefit both the middle class and the caoitalists.
Furthermore, the benefits of home ownership should be seen primarily at the local level, so it makes sense for local governments (rather than the Feds) to encourage it. A rather simple incentive for home ownership is to provide a standard deduction on property tax assessments. However, unlike the mortgage-based subsidies, this doesn't provide any benefit to the banks, so I guess it's dead in the water.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Hadn't thought of it quite like that
but that seems logical, if a bit depressing.
Come, my friends. 'Tis not too late to seek a newer world -- Tennyson
Well, there's two different arguments being made by you
One concerns the role of government. You think it has a legitimate role in promoting home ownership. I don't. But that it isn't the topic at hand so I'll let that one be for now.
The second concerns the idea of using a form of socialism to create the prices, give discounts and absorb the risks (all at the same time) to induce people to buy homes when market conditions may not make it wise.
And because it can and does create false demand, it can push up prices of property which create the mirage of a safety net in the equity. This mirage is exactly what set off the problem.
Realistic interest rates (like real prices for any other good) and real risk responsibility would have stopped a lot of this before it started. There's no counterbalance when these factors don't play a role.
buying up excess food
You should have been a farmer.
I'm guessing that farming is the most socialistic section of our economy (using your definition).
P.S. Your definition of socialism seems to be a bit looser than what I'd consider the classic definition (state ownership), but your definition does cover all of the important aspects of socialism when it comes to the problems of economic coordination or abuse of power. Anyway, you're always free to define your terms, as long as it's clear what you mean.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
thanks.
I was going for the net affect of state ownership even if the elements involved are only half-owned by the state...like Freddie and Fannie.
Interest Rates, of course, are pretty much state owned in so far as the Fed operates as an arm of the state.
Great point! But some niave observations re: the left...
I really think your point is a good one and America would do well to behoove it, thanks!
As for your observation regarding the left not really advocating socialism, I believe you are mistaken.
At this stage of course they are not advocating for some of the finer points of the system, however they are most certainly are attempting to carve out the blunt socialist instrument.
Examples are abundant, most recently Nancy Pelosi called for the nationalization of America's oil refineries
, government provided health care (like the idea or not, it is not the federal governments role), big government entitlement programs of all sorts, welfare programs, government sponsored drug rehabilitation programs, etc, etc. the list is endless.
Meanwhile you have Michelle Obama quoting Saul Alinsky
in her speech on Monday at the DNC!
The DSA
is a tell tale org in and of itself.
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
Pelosi said no such thing.
At least, the article that you linked to didn't report that Pelosi said anything about nationalization.
On other points;
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
You are not very informed about...
...the DSA
. It is hardy some little fringe element, it is filled with democrats, some very influential, and works closely with democratic organizations.
(Open the interactive map in the link.)
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
here's what I found re: refinery nationalization
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
who is Malia Lazu?
In the above video, Lazu is clearly taking a socialist position.
By all accounts, she seems to be a socialist
, but she doesn't seem to have any particular influence outside of her small activist groups 
. (Her current group, Oil Change International 
, has a whopping 4 supporters on Facebook; for comparison Stop the Israeli Confiscation Wall 
has over 9000) However, she put on a good show on Fox, and she seems to have been successful in her organizing effort...so I wouldn't be surprized to see her in more prominent position sin the future.
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
She's a twit, Adam.
People never learn. I could feel the trepidation in Cavuto's face.
even twits can have influence
That's what we're worried about: stupid people in large numbers.
http://images.despair.com/products/demotivators/idiocy.jpg
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
Bryan Caplan's recent book
The Myth of the Rational Voter comes to mind...
It's a danger of democracy
Democracy needs its limits.
If the Bill of Rights could have been eliminated on an up/down vote, they'd have gone before 1850.
The democrats proposed nationalizing...
...Americ's oil refineries in June
.
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
Those words are very common
The purported quoting of Saul Alinsky is dealt with quite handily on the Sadly, No! webpage. The link is in the "Of interest" section on the right hand side of the screen.
Many, many books
talk of the world as it is and the world as it should be. This is a common thread in philosophy.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
Come on Stiner...
...Why can't you admit it?
Though that expression has been pondered throughout mans history....
...It was Barack Obama she was quoting, he was walking with his then girlfriend Michelle, and he looked around and spoke the very words that were coincidentally in Alinsky's book, the book that he was using as a tool for his community organizing at the time.
Get real!
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
Not proven
Prove it to me and I will.
So far all anyone has done is speculated based on circumstantial evidence.
Personally, I don't care if he lifted anything out of Das Kapital. I'm not voting for the man.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
I don't care either...
....it just seems funny that given the facts around it
, it is very likely that it was Alinsky on his mind, yet everyone bends over backwards to suggest he was maybe thinking of some high faluting philosophical figure from ancient history?
That sort of revisionist thinking "rub raw the sores of discontent." ;-)
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
More confirmation bias
To be sure, you (and other Republicans/conservatives) believe it was this Alinsky fellow (I have no clue who he is) because it reinforces your beliefs about Obama.
I hope I don't need to trot out the link
again.
I never broke the law; I am the law! --
George W. BushJudge DreddI'm listening to...
That maybe...
....and the facts.
"A society that puts equality before freedom will have neither. A society that puts freedom before equality will get a high degree of both." ~ Milton Friedman
Obama did not quote Alinsky
As one commenter at Gateway Pundit noted:
"It looks like Michelle Obama actually inverted the Alinsky statement."
If she was referring to Alinsky, she was disagreeing with him. Of course, this entire attempt to link Obama to Alinsky is based on the BS notion that Alinsky couldn't have possibly ever written/said/thought anything of any value.
P.S. Why are these people intent on reliving the 60s?
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas
banking opportunities in China
This is a bit tangential, but the essay about China's banking system reminded me of a bit of news about Taiwan's banks entering the Chinese market
, and its implications for entrepreneurship:
"You have seen how a man was made a slave; you shall see how a slave was made a man." --Frederick Douglas