Not So Inept as We Think

“A good man leaves an inheritance to his children’s children, but the sinner’s wealth is laid up for the righteous” – Proverbs 13:22

The more conservative among us tend to rail against government ineptitude when decrying expansive bureaucracy (here I mean the fiscal conservatives, not necessarily religious conservatives). I have no intention of launching such a tirade today. I’ll simply note that history and experience have proven bureaucracies so utterly inefficient that we really shouldn’t need such a debate.

What I’d actually like to point out is that the top-end policy makers probably aren’t as inept as we think. I suggest that it is quite possible they hit exactly their mark.

Let us consider a simple example – the recent housing bubble. First, let’s examine the causes of the bubble. There are two obvious ones – driven largely by the federal government. The first was a push by the federal government to “make housing more affordable”. This included policies that forced banks to make loans to non-creditworthy borrowers for the sake of some nominal “social justice”. (These policies go back for many decades, but were certainly echoed and supported by President Bush.) Now, was it a worthy goal? Sure, why not. But the implementation was poor. Bankers do have a clue when it comes to lending money and they know who they should and shouldn’t lend to – based on creditworthiness alone.

The second policy of note, and probably a more important one, was the insistence on keeping interest rates low at the Federal Reserve to stave off the 2001 recession. When we coupled these two, we got quite a reaction. Cheap money and a push for easing the credit requirements for homes led to mild run up. The run up led to speculation, fueled in turn by even more cheap money – resulting in a bubble.

Let us briefly revisit the goals, shall we. First, there was affordable housing. Tell me, now is it that increasing prices improves affordability? It doesn’t – this goal was missed in a miserable failure. Then there were the social justice considerations – increasing minority ownership and therefore wealth. Unfortunately, minorities broke into the bubble increasingly later in the game. When it burst, they were the ones who took a massive loss as their homes went “upside down”. Again, miserable failure.

So, shall we conclude that the government is horribly inept and fails at everything? Let me posit that they got exactly what they want. Let us consider the groups that benefited.

The simplest group to consider is homebuilders. They pocketed quite a handsome payday when demand went through the roof (they also have a pretty good lobby).

A far bigger payday went to the bankers … a FAR bigger payday. First, they made a ton of money securitizing loans, packaging them and selling to unsuspecting overseas investors. How does this sound: I borrow money from the government, loan it to an unqualified borrower, package the loan and sell it to the market, and pocket a few % in transaction costs. This is free money and they took a ton of it. Of course, the “chickens came home to roost” one day and the banks faced eminent collapse. What next? Well, then our benevolent policy makers gave billions of taxpayer funds to the banks – so the banks could make loans to the taxpayers. (Doesn’t make sense? It does if you realize whose side the government is on.)

Who else? How about the baby-boomers? Tell me, when prices of an asset are rising, who benefits? That’s right, the people who own the asset. Who loses? The people on the outside trying to get in. The boomers received a huge run up in their home values at the expense of the next generation. Those who were smart enough to downsize before the bust really took advantage and gained a better retirement. This is no surprise though. Government policies of running deficits have always benefited the current generation at the expense of the next. Generational plunder seems the way of things in this country.

Each of these groups have some decent connections to policy makers. Each of them benefited from the bubble. Perhaps the government isn’t inept at all, they were just aiming for a different mark than they claimed.

So, what about the “victims” in all of this? (I use the scare-quotes around victims because even when the deck is stacked against you, you must take responsibility for your own actions.) Well, there is the young adults, the youth, the children, the next generation. Hmmm, most of them can’t vote yet. (Now that’s taxation without representation.) The ones that can are easy to sway with fiery speeches and demagoguery. Both parties have made an art out of being horrible, but deflecting all of their failures to the other guys. Sort of a “vote for us, because they’re awful” approach.

Who else suffers? Well, how about the minorities? Lots of them got wiped out in the boom-bust cycle. No worries, their votes have never been in question. Why pander to people who are locked in?

How about the taxpayer in general? I mean, it was our money that was given to the banks to prop them up. For our part we reacted the right way. The public was overwhelmingly opposed to TARP. Odd – both presidential candidates supported it. Whose side do you think they’re on, ours or the wealthy?

These guys, these politicians and policy makers know exactly what they’re doing. They know exactly who they work for. They know exactly who their task-masters are. They hit their mark precisely.

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As an addendum, consider the current housing market. Prices are falling. Falling prices make things more affordable. Hey, more affordable housing, that’s a good thing, right? So what are the politicians doing? That’s right, they’re trying everything imaginable to prop up the housing market and keep prices high (and therefore unaffordable). Whose side are they on again?

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