Arnold Kling  

A Consensus to Question

Markets for Everything, Minaki... The Housing-Oil Analogy...

Felix Salmon writes,

the main message from the big conference on Fannie and Freddie is that there's a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines.

Old consensus: we need Freddie and Fannie in order to make housing "affordable."

New consensus: we need them in order to "prevent further house price declines," in other words, to make housing less affordable.

I have to question this consensus. It reminds me of the consensus that "We should someday deregulate oil prices, but not now" that prevailed in the late 1970's. President Reagan rejected that consensus, ripped off the Band-aid of oil price controls as soon as he took office, and the consensus now is that he was right to do so. I have been arguing since early in this crisis that we need a similar approach in housing.

Markets achieve a spontaneous order. The opposite of order is disorder. Price controls in the oil market created disorder, to the point where fights broke out in lines at gas stations.

Government interference in housing markets, which helped produce the disorder known as the financial crisis, is still producing disorder. When houses are "owned" only because the government is supplying lenient, subsidized credit, that is disorder. Given this disorder, rational people do not wish to buy. The rational person wants to buy low, sell high, not buy when the market is rigged to try to keep prices higher than they should be.

The effort to prop up home prices does the following:

1. Diverts capital from other uses.
2. Uses up taxpayer money that could be spent on other things.
3. Increases the wealth of people who find suckers to buy their houses at too-high prices.
4. Decreases the wealth of the suckers who buy now.
5. Decreases the liquidity and mobility of people who cannot find rational buyers for their houses because rational buyers do not buy into a rigged market.
6. Decreases the investment opportunities for rational buyers, who are unable to buy homes in an un-rigged market.

The only thing on this list that even looks like a benefit is (3). The consensus that this policy is necessary has to be questioned and challenged until somebody like Reagan comes along and stops it.

Comments and Sharing

COMMENTS (19 to date)
floccina writes:

I could not agree more low prices are good. Presumably propping up prices is to keep home owners more confident and to keep more people in the housing industry employed. The measures seem to not be very effective at either at this point.

Hyena writes:

Unless, that is, the now-SOEs are propping up the mortgage market by providing the securitization infrastructure. Since that's what most of those people generally think, their position is entirely reasonable.

In any case, Fannie and Freddie have been around for a long time but the financial crisis hasn't been. To call them a "contributing factor" is basically to recognize that they were part of the financial sector.

JH writes:

Other than housing, what other goods and services are generally viewed as doing well when prices are high and doing poorly when prices are low? Labor and stocks, obviously. Anything else?

It seems that in almost every area of life, prices dropping is a good thing and prices rising is a bad thing. But, not with housing!

It's good if you already own housing, labor, or stocks. But, bad if you don't already own and you want to own.

Thomas DeMeo writes:

An important distinction: It isn't so much that housing prices are too high, its that we over-invested in the quality of housing. We have too many BMW's and not enough Honda Civics. The cost of building a $400,000 house is still $400,000 (or higher). We just don't have enough money to buy it any more.

tjames writes:

Actaully, I don't think the consensus - as perceived by Wall Street - has changed at all. What has changed is the sales pitch. Look at it this way

Old Consensus: we need Fannie and Freddie in order to make housing loans more affordable. We will sell this to the taxpayers as making homes more affordable since it will allow borrowers (a.k.a. voters) of ever lower means to become home-occupiers.

New Consensus: we need Fannie and Freddie in order to make housing loans more affordable. We will sell this to frightened taxpayers who have seen their potential retirement equity/'piggy bank' shrink or vanish as a way to stem the losses, and as as a means to keep more of them employed in housing construction and subsidiary jobs.

Wall Street knows what it is getting, which is the constant stream of fees on the carrying trade for these loans in all their forms - fees they get to keep no matter what happens afterward. Of course they support anything that subsidizes the loan volume.

Kevin Driscoll writes:

I think the talk about disorder is a bit of a red herring. I was sorta confused when I read that part, until I got to your list of consequences and found we are in complete agreement.

On an unrelated note, I would have bet $10 that the phrase Patterns of Sustainable Specialization and Trade would appear somewhere in this post. Because it hasn't, I am left questioning Dr. Kling's dedication to the Recalculation story.

fundamentalist writes:

Nice post! Thanks! Opponents of free markets often portray them as chaos. They are not. Free markets are nothing but free people. And market based decision making is decentralized decision making. It's very much like democracy, only we vote with our dollars. State-directed decision making is dictatorship.

Free markets are markets planned by democracy; state-directed markets are markets planned by bitter bureaucrats.

Joe in Morgantown writes:

7. Helps the balance sheets of the TBTF at the expense of almost everyone else.

I'm continually disappointed by how comfortable the left is with corporate bailouts.

liberal markets writes:

Arnold, how persistent will the effects of the current low interest rates be? Will the large number of homeowners who are refinancing their mortgages at these low rates be willing to take lower prices when they eventually sell, and will they expect lower prices when they buy? Will the demand for moving be suppressed because homeowners with low mortgages are less willing to sell in future higher-interest rate markets?

david writes:

Excellent, Arnold.

Greg A writes:

This might be the post-of-the year. Very well said...

hutch writes:

maybe i misunderstood what felix was talking about, but doesn't the consensus he's talking about only come from bloggers with a "decidedly center-left bias"? rick santelli probably wasn't invited. geithner knew what any kind of consensus from that kind of crown would have been before he even mailed the invitations. it's the same reason you only ask your friends to come to your birthday party.

Hyena writes:


Technically, there is no disagreement between Felix and Arnold; the latter just thinks this is a good thing. He's also kinda talking his book, he's a professor and unlikely to see a lot of negative impact from it.

liberty writes:

tjames makes a great point. It explains the true reason behind what looks like wildly swinging economic theory. In reality, the idea is to make loans more affordable--with whatever rationale makes the most sense given the current economic situation--so that loans are subsidized, and they can make the big bucks. Everyone on Wall St. and Capitol Hill loves this.

Of course, it does not change the rest of Arnold's post at all.

ThomasL writes:

I would like to lump myself in the rational category of humanity, and I can say that I have been very hesitant to buy.

Not as hesitant as I was ca. 2006, when you'd have had to pay me off with a lot more than a subsidized loan to get me to do it, but hesitant enough not to take the plunge.

I live now near a small town, and as recently as last year there were still 1300sqft houses for sale with asking prices was around $200k ea. -- and there were lots of them. (Many of them are still for sale, but I haven't checked if the prices have changed at all.)

If you can have lots of unoccupied, tiny houses, in a tiny town, almost half and hour from anywhere, in a small and generally undesirable state and the "post-bubble" prices are still better than 5x average income (probably closer to 8-10x average for the town), I maintain something is hinky in the pricing.

hutch writes:


i agree. i guess i was more talking to felix's use of consensus than to arnold's analysis of it. of course a consensus can come from any group; it means a lot less when you pick that group based on people who are more likely than not to agree with you. by felix mentioning rick santelli he makes it look like a broader consensus than a group of people with a distinctive left-center bias.

Doc Merlin writes:

@Joe in Morgantown

The left is mainly about using government money to directly fund special interests and control them through democratic means. "Corporate bailouts" are just another form of centralized planning to them.

Seth writes:

Since gov't efforts to keep housing affordable resulted in the opposite in driving up prices through increased demand, is it reasonable to assume that gov't efforts to keep prices from falling will result in declines by reducing demand. I'd say that's exactly what 4-6 will do.

Chris Koresko writes:

But why are Arnold's points not compelling to the `consensus' economists?

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