This is my column for this week from the Arizona Republic (permanent link):
Government interference will prolong housing woes
Want to make an economic problem worse? Interfere with it.
As I write this, the Federal Reserve Bank just cut the Federal Funds Rate by another quarter-point. Why? To try to stimulate the housing market.
Last week President Bush put together an attestedly voluntary agreement among lenders to freeze interest rates on certain adjustable rate mortgages for five years. The plan is voluntary in the same way that your rowdy Uncle Sid volunteered for the Marines instead of serving 90 days in the clink. Even so, Congress is still rumbling about involuntary solutions to the housing crisis.
So what’s the beef? Everybody’s just tying to help, right?
The problem is that all investment is based on planning. Before I risk my capital, I need a reasonable assurance that it will be returned to me — ideally with a healthy profit. There is always some risk in investing, but if the government can change the rules of the game at any moment, then the risk of investing soars. Doing anything else becomes much more attractive.
Consider: If I plant the right seeds and cultivate them properly, I can expect a bountiful harvest. But if the government were able to control the weather, and if it announced that it might or might not schedule a hard freeze for mid-July, I would be better off doing almost anything other than farming.
If I have capital available to lend, should I lend it where I know for sure I’ll get five percent interest, or should I lend it to a borrower who will promise to pay me eight percent — until Big Mother cuts that back to four percent as an act of mercy. If it were your money — and in many cases it is, in the form of insurance and pension funds — what would you do?
It’s plausible that we’ll go through the same amount of economic pain, with or without government involvement. But free markets self-correct quickly, liquidating bad investments and getting back to business. Government interference will almost certainly prolong our agony — to no good end, and therefore probably to our net detriment.
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Chris Shouse says:
I could not agree with you more Greg. When ever the goverment gets involved the process gets mucked up. Just look at the War on “Poverty” the War on “Drugs” and the War on “Terror” this will become another SandL crisis with study groups looking at the problem getting more of our tax money.
December 15, 2007 — 2:53 pm