What a week it’s been in politics.
On the campaign trail in California, President Obama cried
out, “Free stuff! More free stuff!” The administration is again pushing banks
to make taxpayer-subsidized mortgages to those with weaker credit ratings.
While it is laudable to want folks to own houses, we continue to pursue
policies that increase risk in the housing market. Have we learned nothing from
the Great Recession?
While those on the left love to hate corporations and their
profits, it is instructive to observe how the profit motive works. A
corporation is simply a group of people. Groups of stockholders amass capital,
labor, and know-how to provide something that the public wants. They do this
because they desire to make a return on their capital investment. In the
process, they create jobs, pay wages to employees, and shell out huge sums of
taxes to state, local, and Federal government coffers. Evil stuff, huh?
Now the key to making a profit is to avoid booking a loss.
In the banking scenario, that means loans must be granted conservatively.
Defaulted loans (such as home foreclosures) are very expensive, and many
successful (performing) loans are required to offset the expense of each
failing one. As a result, banks extend mortgages very carefully, controlling the
risk they are undertaking by assessing the ability of mortgagees to repay
their loans. You might say that banks are conservative precisely because of
their profit motive.
And that they are, until Uncle Sugar steps in with promises
to subsidize losses. This reduces the risk that banks face and makes them less
conservative, more willing to make loans to those who wouldn’t otherwise
qualify. This is precisely what happened in the run-up to 2008 and we are
still all paying for the collapse.
There is another path. The safest and most effective way of
getting more folks into their own homes is to make sure that they have good
jobs. Government policies should focus on economic growth and job creation. (A
recent Pew poll revealed that both Democratic and Republican voters agree on
this simple priority). Instead of more free stuff, let’s rely on economic
growth and the dignity of work.
Because, at heart, we really understand that nothing is free. Someone always pays.
