Saturday, October 18, 2008

Global Financial Crisis - Too much Capitalism?

Apparently the financial crisis was caused by unrestrained greed and fear. You'e got to be kidding me.

The root cause, in the US, was centered on the failure of 2 institutions - Fannie Mae and Freddie Mac. But, wait, they were not ordinary private companies. They were both created by federal charter, had an implicit (now explicit) government guarentee, and a mandate act in a political way - increasing housing ownership rather than being purely profit driven.

So, the US government was manipulating US housing and mortgage markets, both through those companies, and through other actions. And not just the federal government, all levels of government worry about housing, affordabity, location, type, and so on.

So, the US government provided a mechanism for higher risk lenders to get mortgages, in order to increase home ownership. So, that increased the demand for housing. But the supply of housing is regulated, by land-use regulations, density restrictions, and anti-urban sprawl rules. The usefulness or otherwise of those rules is not the point, but the result is that the housing supply is not as elastic as it could be under un-regulated conditions.

Hmm, what happens when demand increases, and supply is not elastic. I know, prices go up. So, the net effect appears to be more primarily is the increased cost of housing. Since the cost of housing rises to meet the borrowing limit of those competing to purchase it. I don't think this helped the people that were supposed to being helped. Those people just had higher repayments.

The "rich" on the other hand had the opportunity to ride rising housing prices with multiple investment properties, or the rising value of they're own large properties.

And, after all this government manipulation, the government wouldn't just let things fail as they naturally would. Instead, the government itself borrowed more money, with the expectation of paying it back with future taxes, to prop up the poorly managed, and deny the well managed the cheap assets they otherwise would have been able to purchase.

What's the lesson we should learn? Well, certainly not that poitically-motivated management of the market is a solution for anything.

*shudder*. And, the only regulatary response needed for executive pay, is to make sure corperate structures allow the owners (shareholders) to control it. Even that should not strictly be needed, but, owners should be the one to decide, not the government.