Thursday, January 4, 2007

FHA and Frank

In a previous post I explained how Congressman Barney Frank, the ultra-liberal, views free trade and freedom in general: with disdain. Today the Wall Street Journal published a fresh article about Congressman Frank’s “grand bargain”. It contains most of the same fluff but does expose several of its weaknesses (business interests aren’t monolithic).

The most interesting finding in the article is his plan to instill government domination in the housing market. His plan is to introduce separate bills that will tighten the size of Fannie Mae and Freddie Mac portfolios and loosening the criteria for loan guarantees issued by the Federal Housing Administration. Think about this for a second…he wants to restrict the number of mortgages given by private companies and increase the number of them that the government can manipulate. This is very bad news.

I’m not sure why he (or anybody else) thinks that government can positively manipulate the housing market. Anyone who knows anything about economics knows the effect of insulating the market from risk. Consumers and lenders become risk averse. Lenders lend more than they should while consumers purchase more than they should.

The net effect is that capital is diverted away from business and innovation.

The Frank’s of the world would say that this diversion does not matter because more people, especially minorities, are able to own homes. The increase in homeownership is only anecdotally true. Harvard economist Albert Monroe’s study on the subject only concluded that the FHA’s program “probably” increases homeownership.

Does it make any sense to over extend consumers and divert capital for a program that only “probably” does what it purports?

1 comment:

Me said...

I agree. It is just the left's way of thinking in their feel good manner. Yeah it sounds nice and good on the surface, but in actually it is crap. You can compare it to a Hyundai, yes the car looks good. It is shiny and has a warranty. However once you actually use it is falls apart!