Joined: 28 Dec 2005
|Posted: Fri Feb 13, 2009 3:49 am Post subject: Government and Homeownership
|~From Chapter VI "Credit Diverts Production" in Henry Hazlitt's "Economics in One Lesson," first published in 1946
Ayn Rand Center for Individual Rights
Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.
"Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required" also makes some people more responsible, improves living conditions, adds to both current and future economic growth (e.g. buying housing-related goods and paying-down debt), generates real wealth (including through home improvements and building equity). In short, it raises living standards for some faster.
I stated before, the U.S. housing boom, generally from 1995-06, was created by "excess" capital, from a higher level of U.S. profit growth (including a record 20 consecutive quarters of double-digit earnings growth by U.S. corporations in the mid-2000s) and massive foreign capital inflows (by export-led countries, which received up to 10% annual negative real returns lending money to the U.S.), and some of that capital flowed into the U.S. housing market.
The recent housing boom generated enormous real and nominal wealth. The nominal wealth has declined substantially. However, the real wealth still exists. Was Wall Street or the financial industry wrong for distributing wealth to the masses? I'd say it was needed to raise U.S. actual output towards potential output, because without the U.S. housing boom (and related goods), the negative output gap would have been greater throughout the 2000s.