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Archive for the ‘Housing’ Category

I’ve already explained why the Department of Housing and Urban Development should be eliminated, but a superb column in the Wall Street Journal by my old friend Jim Bovard has my blood boiling.

After reading Jim’s piece, I no longer want to merely abolish HUD. I want to bulldoze the building, cover the ground with six feet of broken glass and rusty nails, and then add a foot of salt to make sure nothing can possibly spring forth again.

In the 1990s, the feds were embarrassed by skyrocketing crime rates in public housing—up to 10 times the national average, according to HUD studies and many newspaper reports. The government’s response was to hand out vouchers to residents…, dispersing them to safer and more upscale locales. Section 8’s budget soared to $19 billion this year from $7 billion in 1994. HUD now picks up the rent for more than two million households nationwide; tenants pay 30% of their income toward rent and utilities while the feds pay the rest. Section 8 recipients receive monthly rental subsidies of up to $2,851 in the Stamford-Norwalk, Conn., area, $2,764 in Honolulu and $2,582 in Columbia, Md. But the dispersal of public housing residents to quieter neighborhoods has failed to weed out the criminal element that made life miserable for most residents of the projects. “Homicide was simply moved to a new location, not eliminated,” concluded University of Louisville criminologist Geetha Suresh in a 2009 article in Homicide Studies. In Louisville, Memphis, and other cities, violent crime skyrocketed in neighborhoods where Section 8 recipients resettled. After a four-year investigation, the Indianapolis Housing Authority (IHA) in 2006 linked 80% of criminal homicides in Marion County, Ind., to individuals fraudulently obtaining federal assistance “in either the public housing program or the Section 8 program administered by the agency.”

In other words, the federal government decided that it wasn’t doing enough damage by being a slumlord. It then decided to directly subsidize rents (often at scandalously high levels), often for the benefit of criminals.

Not surprisingly, proponents of big government are playing the race card, claiming that opposition to rental subsidies is a form of discrimination since a disproportionate share of recipients are minorities. Yet this controversy actually pits law-abiding people, regardless of color, against social-engineering bureaucrats.

…middle-class blacks are the program’s least inhibited critics. Sheldon Carter of Antelope Valley, Calif., testified at a recent public hearing on local Section 8 controversies: “This is not a racial issue. It is a color issue. The color is green and it’s my dollars.” Shirlee Bolds told Iowa’s Dubuque Telegraph Herald in 2009: “I moved away from the city to get away from all this crap. Dubuque’s getting rough. I think it’s turning into a little Chicago, like they’re bringing the street rep here.” Remarkably, HUD seems bent on creating a new civil right—the right to raise hell in subsidized housing in nice neighborhoods.

The bureaucracy’s perverse definition of civil rights is not a recent development, as illustrated by this previous post critiquing HUD’s bean-counting mentality.

The moral of the story, though, is that the federal government has no business being involved in housing. Jim’s closing sentences are a pretty good summary of this outrageous situation.

The Obama administration is now launching a pilot program giving local housing authorities wide discretion to pay higher rent subsidies to allow Section 8 beneficiaries to move into even more affluent zip codes. Hasn’t this program helped wreck enough neighborhoods?

Heck, let’s also add arsenic, lead, and strychnine to the glass, nails, and salt. Maybe some radioactive material as well. No sense taking any chances.

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Here’s a recent interview with Neil Cavuto about bailouts for Fannie Mae, one of the government-created entities used by Barney Frank, et al, to subsidize housing (and line the pockets of well-connected political insiders).

My main concern is not the bailouts, which surely are odious, but whether we can at least limit future damage by getting the government out of the business of misallocating capital and distorting markets.

When in a hole, put down the %*#(& shovel and stop digging!

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Welcome Instapundit readers. Here’s a related link if you want to get even more depressed about politicians digging the debt hole deeper.

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If you want to understand how government intervention screws up markets and damages an economy, there are two new publications worth reading. First, pick up a copy of Reckless Endangerment, a new book by Gretchen Morgenson of the New York Times, and Joshua Rosner, an expert on housing finance.

I’ll confess I haven’t read the book, but it’s on my list based on two columns. Here’s some of what George Will wrote after giving it a read.

The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.” …“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.

And here is some of what David Brooks wrote, in a column that focused on the sleazy insider corruption exposed by the book.

The Fannie Mae scandal has gotten relatively little media attention because many of the participants are still powerful, admired and well connected. But Gretchen Morgenson, a Times colleague, and the financial analyst Joshua Rosner have rectified that, writing “Reckless Endangerment,” a brave book that exposes the affair in clear and gripping form. The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. …Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement. …Johnson roped in some of the most respected establishment names: Bill Daley, Tom Donilan, Joseph Stiglitz, Dianne Feinstein, Kit Bond, Franklin Raines, Larry Summers, Robert Zoellick, Ken Starr and so on. Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next. The scandal has sent the message that the leadership class is fundamentally self-dealing. Leaders on the center-right and center-left are always trying to create public-private partnerships to spark socially productive activity. But the biggest public-private partnership to date led to shameless self-enrichment and disastrous results.

Not surprisingly, politicians have not addressed the problem, even with the benefit of hindsight. The Dodd-Frank bailout bill, which was supposed to address the problems of the housing crisis/financial crisis, left Fannie and Freddie untouched. The two government-created entities are on life support after their bailouts (speaking of which, here’s a funny cartoon), so this would have been the right moment to drive a stake through their hearts. One can only wonder what damage they will do in the future.

But government intervention in housing is not limited to Fannie Mae and Freddie Mac. A new report from Pew looks at the panoply of tax preferences for the industry, and analyzes the impact on overall economic performance. There are parts of the report I don’t like, such as the term “subsidies,” which implies that tax distortions are a form of government spending, but I fully agree that tax preferences harm the economy by causing capital to be misallocated.

Investment in owner-occupied housing faces an effective marginal tax rate of just 3.5 percent. In contrast, investment in the business sector faces an effective tax rate of 25.5 percent. This leads to a tax-induced bias for capital to flow into housing-related uses rather than other types of projects. As a result, businesses are less likely to purchase new equipment and less likely to incorporate new technologies than otherwise might be the case. Less business investment results in lower worker productivity and ultimately lower real wages and living standards. While the housing sector provides employment and has other positive effects on the overall economy and on society, the resources employed in the housing sector displace investment that would otherwise occur in the business sector were it not for the favored tax treatment of housing. The resulting distortion in the allocation of capital likely lowers overall output, because resources are allocated based on tax considerations rather than economic merit. In effect, the United States has chosen as a society to live in larger, debt-financed homes while accepting a lower standard of living in other regards.

The moral of the story is that if more government is the answer, someone has asked a very stupid question.

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I periodically get emails and phone calls from people wanting me to respond to particular statements from politicians, columnists, and other high-profile figures.

Not surprisingly, Paul Krugman occasionally is the subject of these communications, particularly with regards to his view that Keynesian spending is an elixir and universal cure for economic stagnation.

I certainly have waded into the so-called stimulus fight, addressing the issue over and over and over again. But I generally try to comment on the underlying economic and political issues while avoiding pointless arguments with other people (not always with total success, as seen here and here).

The most recent Krugman-related email I received, however, has nothing to do with fiscal policy. It deals with his views on housing bubbles. Here’s what he advised back in 2002.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Given what has happened in the past five years, Krugman’s endorsement of a housing bubble certainly leaves him vulnerable. And if it turns out that Alan Greenspan took his advice, that would be rather damning.

But I think he should be criticized for his general support for economic intervention, not his specific recommendation for a housing bubble.

Sure, his advice doesn’t look very good with the benefit of hindsight, but economists are notoriously awful forecasters, as I’ve noted before. Moreover, Krugman legitimately could argue that his advice was for the specific circumstances of 2002, and not a permanent recommendation.

That’s why my criticism is limited to his overall belief that government should steer the economy. And if you want to understand that issue, this post looking at the work of Robert Higgs is a great place to start.

P.S. If you want some amusing Krugman-baiting, you should read Best of the Web by James Taranto of the Wall Street Journal. Taranto often refers to Krugman at the “former Enron adviser” and routinely mocks Krugman for his silly assertion that horror stories about healthcare in the United Kingdom are false.

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My previous post looked at the federal government’s troubling decision to investigate, persecute, prosecute, and ultimately imprison a random home-loan borrower named Charlie Engle for the crime of mortgage fraud. Citing a column on the legal fallout from the financial crisis in the New York Times, I noted that it was rather odd that the government would target a nobody like Mr. Engle while letting all the big fish swim away.

This story certainly paints a picture of a government that has one set of rules for ordinary people, but an entirely different set of rules for the political elite and those who make big campaign contributions to that ruling class. But I also noted that I’m not a legal expert and was unsure about the degree to which the big players actually broke laws, or whether they simply made stupid business decisions (often encouraged by bad government policy).

The most upsetting part of the story, though, is how the government wound up targeting Mr. Engle. It turns out that an IRS agent, Robert Norlander, must have been competing for the IRS’s Thug-of-the-Year Award (or maybe it was A-Hole-of-the-Year or Jerk-of-the-Year) because here are some of the things he did:

o  Mr. Norlander decided to snoop into Mr. Engle’s because he saw a film about him training for a marathon. In other words, there was no probable cause, no reasonable suspicion, nothing. Just the perverse decision of an IRS bully to go after someone.

o  Mr. Norlander admitted a pattern of thuggish behavior, stating that he will snoop into someone’s private life simply because that person drives an expensive car.

o  Mr. Norlander continued to investigate and persecute Mr. Engle, subjecting him to undercover surveillance, even though his tax returns showed no wrongdoing.

o  Mr. Norlander even engaged in “dumpster dives” to look for evidence of wrongdoing in Mr. Engle’s garbage. Keep in mind that there is no probable cause, no reasonable suspicion, and Engle’s tax returns were legit.

o  Mr. Norlander used a sleazy KGB tactic by sending an attractive woman to flirt with Mr. Engle in hopes of getting him to somehow admit to a crime.

o  Mr. Norlander failed to find any evidence of a tax crime. He couldn’t even hit Engle with a money-laundering offense. But the undercover agent who was part of the “honey trap” was wearing a wire and supposedly got Engle to admit to mortgage fraud and Norlander used that extremely flimsy evidence to justify a Justice Department case against Mr. Engle.

In other words, this whole thing has a terrible stench. Assuming the details in the story are accurate, we have an IRS agent engaging in a vendetta against someone, and then apparently justifying his jihad by figuring out how to nail the guy for a very weak charge of mortgage fraud. I would refer to Mr. Norlander as a “rogue agent,” but apparently his jackboot behavior is business-as-usual at the IRS.

Here are the relevant passages from the New York Times column.

Mr. Engle received $30,000 for his participation. The film, “Running the Sahara,” was released in the fall of 2008. Eventually, it caught the attention of Robert W. Nordlander, a special agent for the Internal Revenue Service. As Mr. Nordlander later told the grand jury, “Being the special agent that I am, I was wondering, how does a guy train for this because most people have to work from nine to five and it’s very difficult to train for this part-time.” (He also told the grand jurors that sometimes, when he sees somebody driving a Ferrari, he’ll check to see if they make enough money to afford it. When I called Mr. Nordlander and others at the I.R.S. to ask whether this was an appropriate way to choose subjects for criminal tax investigations, my questions were met with a stone wall of silence.) Mr. Engle’s tax records showed that while his actual income was substantial, his taxable income was quite small, in part because he had a large tax-loss carry forward, due to a business deal he’d been involved in several years earlier. (Mr. Nordlander would later inform the grand jury only of his much lower taxable income, which made it seem more suspicious.) Still convinced that Mr. Engle must be hiding income, Mr. Nordlander did undercover surveillance and took “Dumpster dives” into Mr. Engle’s garbage. He mainly discovered that Mr. Engle lived modestly. In March 2009, still unsatisfied, Mr. Nordlander persuaded his superiors to send an attractive female undercover agent, Ellen Burrows, to meet Mr. Engle and see if she could get him to say something incriminating. In the course of several flirtatious encounters, she asked him about his investments. …Unbeknownst to Mr. Engle, Ms. Burrows was wearing a wire. …No tax charges were ever brought, even though that was Mr. Nordlander’s original rationale. Money laundering, the suspicion of which was needed to justify the undercover sting, was a nonissue as well. As for that “confession” to Ms. Burrows, take a closer look. It really isn’t a confession at all. Mr. Engle is confessing to his mortgage broker’s sins, not his own.

Now you understand why I’m a libertarian. As George Washington is reported to have stated, “Government is not reason; it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master.”

Unfortunately, thanks to bad laws and thuggish bureaucrats, that government is now our master.

A previous post of mine addressed the issue of whether Republicans were right to trim the IRS’s budget. So long as the IRS is employing thugs such as Mr. Norlander, the answer is a resounding yes.

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Joe Nocera has a must-read story in the New York Times about how the legal fallout from the financial crisis. His basic theme is that the government let all the bigwigs get away with their crimes, but then has a fascinating discussion about how the government targeted an inconsequential mortgage borrower.

I’m not sure I accept the first part of his premise. There were lots of sleazy people taking advantage of the perverse system created by bad government policy, but I would like to see some clear evidence of actual crimes before hopping on that bandwagon. Selling mortgage-backed securities filled with crummy home loans to Fannie Mae and Freddie Mac may have been immoral, for instance (at least from a libertarian perspective), but I’m not aware that it is against the law to make choices that hurt the economy – particularly when government policy is designed to reward such stupidity.

That being said, I do wonder why there haven’t been any bribery prosecutions of the politicians who got sweetheart loans as part of the “Friends of Angelo” scheme. Actually, I don’t wonder why politicians such as Chris Dodd and Kent Conrad got a free ride. Politicians operate by the principle that law are only for the little people. Nonetheless, these are examples of real laws being violated.

But I’m digressing. The purpose of this post is to show how the government decided to go through great effort and expense to nail someone who, at most, was willing to go along with the government-subsidized and government-created housing scam.

Here are the sordid details.

A few weeks ago, when the Justice Department decided not to prosecuteAngelo Mozilo, the former chief executive of Countrywide, I wrote a column lamenting the fact that none of the big fish were likely to go to prison for their roles in the financial crisis. …There was, in fact, someone behind bars for what he’d supposedly done during the subprime bubble. …Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets? No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans. …It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case. …Even the jurors seemed confused about how to think about Mr. Engle’s supposed crime. When it came time to pronounce a verdict, the jury found him not guilty of providing false information to the bank, which would seem to be the only fraud he could possibly have committed. Yet it still found him guilty of mortgage fraud. “I think the prosecution convinced the jury that I was guilty of something but they weren’t sure what,” Mr. Engle wrote in an e-mail. …Even when he emerges from prison, though, his ordeal will not be over. As part of his sentence, Mr. Engle was ordered to pay $262,500 in restitution to the owner of his mortgages. And what institution might that be? You guessed it: Countrywide, now owned by Bank of America. Angelo Mozilo ought to get a good chuckle out of that one.

Later today, by the way, I’ll post about the IRS’s disgusting role in this story.

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Very few things that happen in Washington are legitimate functions of the federal government. I’ve already posted about the need to dismantle the Department of Transportation and send it back to the states, but some things  shouldn’t even be handled by state and local governments. Housing is a perfect example. There should be no role for government in building or subsidizing housing, period.

But I’ll be happy if we can simply get rid of the Department of Housing and Urban Development in Washington. This $53 billion turkey should be the top target for GOP reformers.

Fealty to the Constitution should be the only reason lawmakers need to abolish HUD, but if they’re looking for some tangible examples of how the Department squanders money, J.P. Freire of the Washington Examiner opines on the issue, citing some devastating findings in a report from the Center for Public Integrity.

In the more than 3,000 public housing agencies nationwide funded by the Department of Housing and Urban Development, and particularly inside the 172 that HUD considers the most troubled, ABC News and the Center for Public Integrity found a struggle to combat theft, corruption, and mismanagement. According to the report, one official embezzled $900,000 and bought a mansion. Other funds went to support sex workers. In other words, this is a perfect illustration of why recommending cuts to such assistance programs is not heartless but actually wise — waste is rampant:

The problems are widespread, from an executive in New Orleans convicted of embezzling more than $900,000 in housing money around the time he bought a lavish Florida mansion to federal funds wrongly being spent to provide housing for sex offenders or to pay vouchers to residents long since dead. Despite red flags from its own internal watchdog, HUD has continued to plow fresh federal dollars into these troubled agencies, including $218 million in stimulus funds since 2009, the joint investigation found.

These are horrific examples of government waste, and they are tailor-made for soundbites and blog posts, but waste, fraud, and corruption are not the real issues. HUD should be abolished even if every penny of the budget could be accounted for. If Republicans can’t get rid of HUD, voters should get rid of Republicans.

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The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.

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Considering they could have sat on their hands and relied on unhappy voters to give them big gains in November, I’m not too unhappy about the House GOP’s “Pledge to America.” Yes, it’s mostly filled with inoffensive motherhood-and-apple-pie language, but at least there’s some rhetoric about reining in excessive government. After eight years of fiscal profligacy under Bush, maybe this is a small sign that Republicans won’t screw up again if they wind up back in power. That being said, I was a bit disappointed that the GOP couldn’t even muster the courage to shut down Fannie Mae and Freddie Mac, the two corrupt government-created entities that bear so much responsibility for the housing mess and subsequent financial crisis. The best the GOP could do was to say “Since taking over Fannie Mae and Freddie Mac, the mortgage companies that triggered the financial meltdown by giving too many high risk loans to people who couldn’t afford them, taxpayers were billed more than $145 billion to save the two companies. We will reform Fannie Mae and Freddie Mac by ending their government takeover, shrinking their portfolios, and establishing minimum capital standards.” Is it really asking too much for Republicans to simply say “The federal government has no role in housing and Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development should be eliminated.” Heck, the GOP’s Pledge doesn’t even mention a penny’s worth of budget cuts for HUD. Here’s an excerpt from Peter Wallison’s Bloomberg column, which explains why Fannie and Freddie should be decapitated.

In a year when angry voters are demanding a reduced government role in the economy, it is remarkable that most of the ideas for supplanting Fannie Mae and Freddie Mac are just imaginative ways of keeping government in the business of housing finance. …This is pretty astonishing. One would think that something might have been learned from the recent past, when two New Deal ideas for government housing support–the savings and loan industry and the government sponsored enterprises, Fannie Mae and Freddie Mac–failed spectacularly. It cost taxpayers $150 billion to clean up the first and may cost more than $400 billion to resolve the second. …government policy that deliberately degrades loan quality or creates moral hazard will eventually cause devastation in the housing market. …Government involvement in housing finance is an invitation to disaster. As illustrated by the S&Ls and GSEs, no matter how such a system is structured, government support will hide the real risks.

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George Melloan’s column in the Wall Street Journal discusses the new Basel capital standards and correctly observes that 22 years of global banking regulations have not generated good results. This is not because requiring reserves is a bad thing, but rather because such policies do nothing to fix the real problem. In the case of the United States, easy money policy by the Fed and a corrupt system of Fannie Mae/Freddie Mac subsidies caused the housing bubble and resulting financial crisis. Yet these problems have not been addressed, either in the Dodd-Frank bailout bill or the new Basel rules. Indeed, Melloan points out that Fannie and Freddie were exempted from the Dood-Frank legislation.

There’s something to be said for holding banks to higher capital standards, even at the cost of more constrained lending and slower economic growth. But the much-bruited idea that Basel rules will make the world freer of financial crises is highly doubtful, given current political circumstances. The 2008 financial meltdown was not primarily the result of lax regulation but of co-option and abuse of the U.S. financial system by the political class in Washington. The federal government’s “affordable housing” endeavors, beginning in the 1990s, allowed and even forced banks to make highly risky mortgage loans. Those loans were folded into mortgage-backed securities (MBS) sold in vast numbers throughout the world, most promiscuously by two government-sponsored enterprises, Fannie Mae and Freddie Mac. The Federal Reserve contributed a credit bubble that caused house prices to soar, a classic asset inflation. When the bubble began to deflate in 2007, the bad loans in mortgage securities became poisonous. The MBS market seized up, and financial institutions holding them became illiquid and began to crash. The Lehman Brothers collapse was the biggest shock. The only way Basel standards might have helped prevent this would have been if they had been applied to Fannie and Freddie as well as to banks. They weren’t. President Bill Clinton exempted the two giants from Basel capitalization rules because they were the primary instruments of a federal policy aimed at helping more lower-income people become homeowners. This was a laudable goal that ultimately wrecked the housing and banking industries. Washington has learned nothing from this debacle, which is why the next financial crisis is likely to have federal policy origins and may come sooner than we think. Fannie and Freddie—now fully controlled by Uncle Sam and exempt from the Dodd-Frank financial “reform” legislation—are still going strong, guaranteeing and restructuring loans while they continue to rack up huge losses for taxpayers. …The record since the Basel process began 22 years ago doesn’t generate faith in banking regulation either. Basel rules didn’t prevent the collapse of Japanese banking in 1990, they didn’t prevent the 2008 meltdown, and they are not preventing the banking failures that plague the financial system even today.

P.S. The bureaucrats and regulators who put together the Basel capital standards were the ones who decided that mortgage-backed securities were very safe assets and required less capital. That was a common assumption at the time, so the point is not that the Basel folks are particularly incompetent, but rather that regulation is a very poor substitute for market discipline. Letting financial firms go bankrupt instead of bailing them out would be a far better way of encouraging prudence.

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For those who favor truth in labeling, the housing meltdown and related financial crisis and economic downturn should be brightly stamped with the phrase, “Made in Washington.” Here are two good pieces of evidence. First, this paper from the American Enterprise Institute is one of the best big-picture analyses on the issue. It identifies how “affordable lending” policies are at the heart of the problem. Here’s an excerpt from the abstract.

Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of overleveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

Then, to show a good example of Mitchell’s Law, which is how bad government policy leads to more government policy, here’s a story about the fiasco surrounding President Obama’s mortgage subsidy program. The government is so bloody incompetent, it can’t even give away money effectively.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration’s flagship mortgage-relief program have fallen out. The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year. “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics. …Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out. Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. And some of the largest mortgage companies in the program have offered alternative programs to those who fell out.

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I appeared on CNBC earlier today to explain why a stake should be driven through the heart of Fannie Mae and Freddie Mac. My debate opponents seems to be somewhat on the right side and admits that Fannie and Freddie are bad news, but inexplicably wants to keep them alive.

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John Stossel appropriately scolds the former Federal Reserve Chairman for blaming the financial crisis on the free market. I’ll go one step farther and say that Greenspan’s behavior is a reprehensible example of someone lacking the cojones to take responsibility for his mistakes. Greenspan is surely not responsible for the corrupt system of subsidies from the government-created nightmares known as Fannie Mae and Freddie Mac, but he definitely deserves the lion’s share of the blame for the Fed’s easy-money policy of artificially-low interest rates. Greenspan presumably knows he screwed up, which makes his attack on free markets especially despicable. The icing on the cake is that he’s also sucking up to the political establishment by endorsing higher taxes. Hasn’t he already done enough damage?

I’m getting tired of Alan Greenspan. First, the former Federal Reserve chairman blamed an allegedly unregulated free market for the housing and financial debacle. Now he favors repealing the Bush-era tax cuts. …During a congressional hearing two years ago, Greenspan shocked me by blaming the free market — not Fed and housing policies — for the financial collapse. As The New York Times gleefully reported, “(A) humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets.” He said he favored regulation of big banks, as if the banking industry weren’t already a heavily regulated cartel run for the benefit of bankers. Bush-era deregulation is a myth perpetrated by those who would have government control the economy. We libertarians were distressed by Greenspan’s apparent abandonment of his free-market philosophy and his neglect of the government’s decisive role in the crisis. …now Greenspan, going beyond what even President Obama favors, calls on Congress to let the 2001 and 2003 Bush tax cuts expire — not just for upper-income people but for everyone. …the stupidest thing said about tax cuts is the often-repeated claim that “they ought to be paid for.” How absurd! Tax cuts merely let people keep money they rightfully own. It’s government programs, not tax cuts, that must be paid for. The tax-hungry politicians’ demand that cuts be “paid for” implies the federal budget isn’t $3 trillion, but $15 trillion — the whole GDP — with anything mercifully left in our pockets being some form of government spending. How monstrous!

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Whether we’re looking at TARP bailouts, Obamacare, or tax loopholes, a common theme is that politicians implement a policy by arguing they want to help the less fortunate. When the dust settles, however, it is often the case that politically well-connected rich people are the big beneficiaries. The overall economy tends to be weaker, meanwhile, and the specific sector suffers because of resource misallocation, so poor people actually fall farther behind. A good example is rent control. The Wall Street Journal has an editorial citing the case of Bianca Jagger to illustrate how the law has become a giant rip-off that deprives landlords of their property rights while lining the pockets of the elite. Those lower on the income scale, by contrast, suffer because of a housing market crippled by government intervention.
Jetsetter and social activist Bianca Jagger has lost her legal bid to keep her knock-down-price rental at 530 Park Avenue. A New York state judge last week ordered Mick’s ex to pay $708,600 in back rent and other fines to her landlords. Ms. Jagger spent nearly 20 years in the two bedroom apartment—rent-stabilized at $4,600 a month. But then she complained about poor upkeep. The landlords in turn noted that Ms. Jagger, in the U.S. on a tourist visa, shouldn’t pay the lower rent since New York isn’t her “primary residence,” one of the criteria under rent control laws. A state appeals court sided with them in 2008 and last week another court upheld the decision and said she could be evicted. As part of the fine, the judge ruled that Ms. Jagger owes $246,468 for the “fair market use and occupancy” over the years she was in dispute with the landlords. They said the apartment would have gone on the open market for $8,800 a month. The case sums up the insanity of regulating prices in one of the world’s most competitive and dynamic real estate markets. Rent control, a “temporary” World War II-era measure that survives into this century, creates housing shortages, drives up prices for non-rent control real estate and contributes to middle class flight. As Ms. Jagger perhaps found out with her moldy apartment, artificially keeping down rents gives landlords the rational financial incentive to skimp on upkeep. Worse than that, rent control disproportionately subsidizes the affluent. A Harvard University study in the late 1980s found that rent-controlled apartments were in some of the cities best neighborhoods, that 94% of its tenants were white and roughly three-quarters were families without children.

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I did a post yesterday about the IRS screwing up and sending housing tax credits to prison inmates. Apparently, the 100,000 bureaucrats at the IRS were unable to put 2 and 2 together and realize that jailbirds – by definition – are not buying new homes. I also appeared on MSNBC to talk about the issue, and took the opportunity to explain that much of the blame belongs with politicians who created a tax code that nobody understands.

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There really isn’t much I can add to this story in USA Today about the IRS giving money to prisoners. Yes, it is a story about typical government incompetence. But it also shows the inevitable problems that occur when government engages in industrial policy and social engineering via the tax code. Let’s call this argument 1,549,628 in favor of the flat tax.

Despite efforts by the IRS to combat scams, thousands of individuals — including nearly 1,300 prison inmates — have defrauded the government of millions of dollars in home buyer credits, Treasury’s inspector general reported Wednesday. …1,295 prisoners, including 241 serving life sentences, received $9.1 million in credits, even though they were incarcerated at the time they reported that they purchased their home. These prisoners didn’t file joint returns, so their claims could not have been the result of purchases made with or by their spouses, the report said. 2,555 taxpayers received $17.6 million in credits for homes purchased before the dates allowed by law. 10,282 taxpayers received credits for homes that were also used by other taxpayers to claim the credit. In one case, 67 taxpayers used the same home to claim the credit.

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I debate my statist buddy Christian Weller on Larry Kudlow’s show.

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The Wall Street Journal opines about the Department of Housing and Urban Development extorting a local community into engaging in a perverse form of racial/social engineering. Apparently, the bureaucrats in Washington are upset that people self-segregate on the basis of income (which the pencil-pushers magically equate with racism even though well-to-do minorities have no problem living in nicer neighborhoods. The real lesson here, though, is that the Department of Housing and Urban Development should be dismantled. It is not the job of the federal government to subsidize housing. The nanny-state social engineering is just the insult added to injury:

The bad news is that Westchester County, the sprawling suburb just north of New York City, has been pressured to settle a federal lawsuit brought by liberal activists over “affordable” housing. The worse news is that the Obama Administration wants the settlement to be a template for the rest of the nation. The three-year-old lawsuit alleged that Westchester had accepted federal housing funds but failed to provide enough affordable housing and reduce segregation in some of its wealthier communities, such as Scarsdale and Chappaqua, home to Bill and Hillary Clinton. In February a U.S. District Court judge in Manhattan ruled that Westchester’s integration efforts were insufficient, and rather than risk losing out on more federal money, county officials struck a deal with the Department of Housing and Urban Development this week. Within seven years, the county will construct or acquire 750 homes or apartments, 630 of which must be located in communities that are less than 3% black and 7% Hispanic. “We’re clearly messaging other jurisdictions across the country that there has been a significant change in the Department of Housing and Urban Development, and we’re going to ask them to pursue similar goals as well,” said HUD Deputy Secretary Ron Sims. …Blacks have long populated Westchester towns such as White Plains, New Rochelle and Mount Vernon, and the Administration is assuming that low percentages of racial and ethnic minorities in places like Scarsdale are a result of discrimination. Yet there’s no pattern of fair housing complaints or other evidence showing that black families with incomes similar to whites in more upscale neighborhoods were barred from those jurisdictions. History also demonstrates that racial and ethnic minorities have incurred far less resistance when they move into neighborhoods where they can afford to live. The black and Latino suburban population is increasing steadily as the household incomes of those groups rise. But social engineers who want to force the issue risk creating more problems than they solve. Most people believe in integrated neighborhoods provided they’re a consequence of genuine choice, not the government deciding where it wants people to live.

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