Thursday, August 26, 2010

Can the State Create Effective Housing Policy When There is No Rational State Interest in Housing?

Economix pointed me to a good report on Fannie Mae and Freddie Mac.  I think the data is fairly clear.  Fannie and Freddie weren't causal, they didn't help matters, and the idea that the government should be encouraging home ownership is basically hare-brained.

More specifically, both organizations performed very poorly in their core business, not just when they got creative and went into exotica.  They lost money on pretty much everything.  As for the argument that Fannie and Freddy were behind the housing bubble, their market share declined from 80% in 2001 to a low of 46% in 2006.  While I'm sure someone that knows more than me about mortgages will probably be able to make a convoluted argument as to why this doesn't prove anything, I think it's pretty strong evidence that there were other problems that were more important.

There's lots of good stuff in the report and it's easy reading.  Lots of charts and bullet points.  I'd encourage you to take a look.  And let me know if you think government guarantees of mortgage is still a good idea after reading it.

Personally, I see no state interest in encouraging home ownership in the first place.  I understand that it's popular, but I can't get from any of the arguments to a convincing argument that there's a state role there.  I think this is important.  A very simple model of determining what the state should, and should not be, involved in is simply asking how does this intervention increase the prosperity of the state as a whole?  If you can't answer that, the state shouldn't be involved.  The reason simply being that if this question can't be answered there is no consistent guiding policy for the intervention between administrations and policy that lacks direction will simply waste resources.  The more a state's policies conform with an idea of what a state's interests are the more likely there will be coherent policy, leading to a more prosperous state and indirectly to more prosperous citizens.  Ignore this, and simply say a policy is for the good of the citizens, and resources are simply wasted.  This is an area it's unlikely that the state can effectively create consistent policy for.  Leave the market to do that.

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