I agree with Kling, in that when you say something is imperfect, it should always be asked, "compared to what?" Some theoretical nirvana where a social planner has full information and maximizes everyone's utility (a favorite scenario of economic theorists, Nobel laureates, and now liberal hacks Joe Stigltiz and Paul Krugman)? Thaler jumps on the bandwagon, and argues that just because investors wanted to buy mortgages where the borrower had no money down, and no income verification, does not mean we should have given it to them. True enough, but where was he in 2006, before this became obvious? Academia and government -- the heart of technocratic solutions -- celebrated the flawed work of Alicia Munnell at the Boston Fed that started the race to the bottom in underwriting standards.
But who is pushing no money down mortgages now? The government. The FHA has a program that allows qualified buyers to put down only three percent. Regulators are encouraging loan modifications with 125 percent loan-to-value ratios, and bankers I have talked to feel forced to make what they consider bad loans. These guys should be given more power? The new Consumer Finance Protection Agency supposedly will only double down: "A critical part of the CFPA's mission should be to promote access to financial services, especially for households and communities that traditionally have had limited access." This means higher taxes, or government mandates that make firms subsidize some desirable products with those not deemed worthy (such as merely financing investment). How many more great ideas like this can we survive?
Government mandates hinder us more than they help
Liberals are fond of noting the complex, beautiful equilibrium in our environment. Consider the economy as an ecosystem growing in an equilibrium designed by no single agent. If you try to make it 'better', given the political realities of how rules and taxes are created, 99 percent of the time you create a counter effect that makes it worse, as a good idea is conflated with some targeted redistribution. Efficient outcomes rarely meet our egalitarian standards. To the extent people are bravely stating something unassailable, such as one should not expect home prices to rise, they are saying something important but redundant given market prices. Even then, the government, our regulatory saviors, is still working at cross purposes.
Follow Blog War on the efficiency of markets:
- Justin Fox, Aug. 3: The Price Isn't Always Right
- Eric Falkenstein, Aug. 4: In Defense of Efficient Markets
- Justin Fox, Aug. 5: Markets Can Do Many Things Well, But Not Everything
- Eric Falkenstein, Aug. 6: Why Most Market Regulation is Useless And/Or Harmful
- Justin Fox, Aug. 7: Back to the Myth of the Rational Market
- Eric Falkenstein, Aug. 10: We Need Less Regulation, Not More