Wednesday, December 26, 2007

There are worse things than regulation. One of them is not enough regulation.

We saw more fallout from the mortgage crisis this week, as we find that home prices dropped 6.7% since this time last year. Many large metropolitan areas registered double digit declines in home prices since October of2006 with the highest being Miami, Florida where housing prices dropped 12.4% in that month. The rate of growth in housing prices began to decline in 2005 but it was not until late 2006 that prices themselves began to drop, slowly at first but with an accelerating trend.

This line sums up what part of the problem is:

The Case-Shiller report emerged as some economists and industry analysts are beginning to lower their expectations for housing markets, predicting a longer and deeper price slump than they had previously forecast.

NOW they figure out that this isn't just a minor hiccup? Tell that to a family who has been working hard and paying their bills but is now being foreclosed out of their house because their payments have doubled.

As we know, much of this was caused by unregulated or under-regulated or regulated but not enforced lending practices. Like the 1980's Savings and Loan debacle, this is the latest example of where lax government regulation and oversight has created problems that ultimately effect the economy as a whole and everyone in the country.

There are those who have an 'economic libertarian' view, in which they argue that government regulation is always or almost always a bad thing because it restricts economic freedom, and oppose almost all regulation. In their view, essentially an extension of the now-discredited philosophy known as "Social Darwinism" the world is made up of essentially two kinds of people, 'sharks,' and 'marks.' The 'sharks' are those, like the great showman P.T. Barnum, who are somehow blessed to be smarter or otherwise better repositories for wealth, and so they have a natural advantage over the 'marks,' which means anyone the 'shark' can snooker out of their money. Barnum once had a famous way of describing the 'marks,' when he said in response to someone who questioned why people kept falling for his tricks even when they were publicized, "There's a sucker born every minute."

But every time the 'sharks' get their way (generally in a situation like this where unscrupulous people figure out a way to make money that the government doesn't catch up to, and usually during a time period when those in charge of the government don't want to catch up very quickly) in the end a few people make a lot of money, sometimes a few people go to prison (as in the Enron/insider trading scandal of the early part of this decade) and many, many people end up on the short end of the stick. And in the end that costs society as a whole, when we have to pay to prosecute the insider traders or bail out the S&L industry in order to save millions of people from losing their savings, or recently when the government had to intervene to get the banking industry to reduce payments for some homebuyers so there won't be even more foreclosures.

In the past, government has had to regulate, over the objections of those who did not want it eveything from legal working age to workplace safety to pollution standards. Before that, seven year olds could be forced to work for long hours for very little money, children and adults could work in filthy, dangerous conditions in which injuries and death in the workplace were commonplace (workers, after all, were easier to replace than expensive equipment) and there was little concern about toxic pollutants, either in products or what was dumped out into the enviroment for the rest of the world to drink, inhale or otherwise be exposed to. We got a dose of that recently with the discovery of unhealthy levels of lead in children's toys imported from China. In China the government does not consider consumer safety to be very important so not surprisingly, millions of kids in America yesterday opened presents that conform to Chinese standards, but not necessarily to American standards. Pray to God that they all do (because it is extremely optimistic to think that during the recent furor we caught all of them, with 80% of U.S. toys coming from China).

Which in turn points out that we need to consider how to regulate products that are made outside the U.S. and how to condition trade agreements on that (I once wrote a post about free trade agreements in which I suggested that the U.S. enter into trade agreements with other countries only contingent on upholding American labor and environmental standards, but as recent events have made clear, I should have added consumer safety to the list.

I'm not saying that Government regulation is the answer to everything, but clearly those who argue that they are not needed and that industries can 'police themselves,' have failed in their argument. Or perhaps the banking industry has made the case for them that there has to be more government oversight. Because we see here the great lesson that undid Social Darwinism, and reached its sickening climax during the Second World War: No matter how much freedom and how much power people have, human beings are still the same, and you won't create a 'better' kind of human by just letting things go. Government was originally designed to be an arbiter as to what people can do, and it is still needed in that role.

CORRECTION: As commenter IndyVoter points out I misread the report, the drop was between October 2006 and October 2007 (I had originally read it as a drop JUST in October 2007). That has been corrected.

That represents my tenth material error in 719 posts (four of which have been pointed out by the same commenter), representing a fielding percentage of .986


Indy Voter said...

That 6.75 decrease was a year-over-year change, not a singl month change, Eli.

You've done an incredibly poor job of tying the collapse of the overheated real estate markets to a failure to regulate, and an even poorer one in saying what regulations you think would have prevented this mess (or, alternatively, what regulations should see us out of it). That's not surprising, because the overheated real estate market is independent of regulation. For whatever reasons people came to believe that home prices would keep going up forever - or at least would keep going up until they could get out of harm's way - and that's folly. It happened in the Roaring Twenties in Florida, and was one of the triggers of the Great Depression. It also happened in Massachusetts while Michael Dukakis was governor and was regulating everything he could (and that the Democratic legislature would allow). It's happened again now. And in all three cases the underlying reason was the unrealistic expectation on the part of a great many people that increases would continue forever.

Eli Blake said...

You're right, it's since that time last year. I changed it.

As to regulation, a lot of it has been addressed by regulations that were just put in place this past month, for example that no longer allow mortgages without any proof of the ability to pay.

shrimplate said...

You've done an incredibly poor job of tying the collapse of the overheated real estate markets to a failure to regulate...

In other words, you have aptly demonstrated that free markets are able to produce incredible messes that can horribly disrupt the lives of many thousands of families that live in the lower percentile economic ranges.

Free markets: they're not just for the Third World anymore.