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The Cure is Worse than the Disease

17 December 2007

From George Will’s latest column in the Jewish World Review Online:

Perhaps Washington’s intervention in the subprime problem reveals the tiny tip of an enormous new entitlement: People who voluntarily run a risk, betting that they will escape unscathed, are entitled to government-organized amelioration when they lose their bets. The costs of this entitlement will include new ambiguities in the concepts of contracts and private property.

It’s time for Americans to reflect soberly of the heretofore relatively hidden costs of neosocialist utopianism, otherwise known as either modern liberalism or, more euphemistically, progressivism.  Will is essentially saying this:  here we go again, with our imaginations on overdrive, dreaming up shiny new toys we’d like to have and then using the cynical power of diffuse coercion – a slumbering Congress, a self-consciously vain Senate, a legacy-seeking Executive Branch – to create them out of thin air.

Many of our representatives will quote the old maxim when it suits them:  there’s no free lunch.  But they will dutifully forget such venerable wisdom when faced with an opportunity to capitalize on their TV face time after having voted to engage in the modern version of price-fixing and price supports, effectively setting aside lawfully agreed, mutually beneficial sales contracts that you and I know as home mortgages.  The market – that easily neglected, faceless structure that makes a lot of wonderful things possible, including the conversion of exclusive luxuries into ubiquitous commodities (can anybody say, “personal computer?) – is simply and capriciously outvoted by a well-meaning but hopelessly naive government, a government that apparently does not know that it was the marketplace that generated the revenue stream that feeds its voracious appetite for new favors to bestow.  Favors, by the way, that hack away at the very roots of the vine that makes those favors so enticing in the first place.

Where freedom reigns, contracts are holy.  Not perfect, but holy.  Without the assurance that a breach will be remedied by predictable legal means, or without the assurance that only the voluntary parties to a contract are empowered to set any of its provisions aside, contracts are unnaturally risky.  So their price goes up, putting another increment of the market out of reach of the common man.

Is that so hard to understand?  And yet the government of the United States reflexively reaches for any first-order remedy it can imagine, no matter the secondary effects or implications.

I can see it now.  The standard lender’s contract will one day have a new, standard clause to insure the lender against federal meddling:  “In the event that the U. S. government enforces a freeze on adjustable-rate mortgages, this contract will be null and void, and the balance of the principal will be due immediately.”

Shortly thereafter, the homebuyer’s contract will bear this clause:  “In the event that a lender’s contract is declared null and void due to a freeze on adjustable-rate mortgages, this sales contract will be null and void, and the property will revert to Seller.”  Who will want to sign that contract?  Certainly not the middle-income family who cannot afford to lose its only real repository of equity.  In fact, the only purchasers who would be willing to sign that kind of contract would be those for whom financing is just a convenient option, not a requirement, for the transaction to take place.  In other words:  the rich.

It is axiomatic that the availability of a thing declines in proportion to the extent to which the government regulates it.  We saw it with gas prices during the embargo, and we will see it in the housing market.  The risk that government will pick the lender’s pockets by arbitrary decrees has to be internalized in the form of higher costs of capital, which you and I know as mortgage rates.

Government meddling has hidden costs, but the costs are not only the short-term, obvious, economic ones.  What suffers the most and the most quietly are the institutions that bring stability and predictability to market transactions:  property rights and enforceable contracts.  Together, those two precepts lower the overall cost of doing business.  It follows that chipping away at them will have the opposite effect, which will make good things less affordable, not more so.


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