Experienced professors in universities and colleges are well-acquainted with a certain category of student, clearly ill-suited to the environment in which they find themselves. Often, such students are pushed beyond their abilities and/or their interests, by parents, siblings, or peers, or are motivated by a lack of desire to enter the regular work-force. So, they enroll in college, hopefully to pursue ‘the good time’. They quickly build up an unmistakable record of poor attendance, late delivery of work, academic course withdrawals and, if they are really poorly-treated by excessively tolerant faculty, of grade incompletes and grade inflations to keep them in the program. The end is completely foreseeable: termination of their degree programs, either mercifully swiftly or painfully slow, depending upon the quality of their program and the senses (good or bad) of their instructors. The failure surely in large part is their own. But the failure is also institutional, with revenue-greedy and socially over-sensitive, politically-correct administrators grasping for admittances among the clearly unsuited lower tails of both the ability and the motivation distributions.
So it is with US home-ownership. As with university education, home-ownership for individuals and families with the wherewithal and the commitment, is a wonderful aspiration and a comforting environment. Indeed, it is the bedrock of a civilized society. But, as with university education, it is clearly not for everyone. For those who lack the ability, or the motivation, or the sheer good fortune, to build a sufficient asset-base and to hold down a sufficiently remunerative job, home-ownership is a crippling burden, draining resources, and placing intolerable economic and social pressures upon the weak and the vulnerable to maintain life-styles that are well beyond their reach.
In a well-functioning market system, households would unfold themselves like some giant jigsaw puzzle into appropriate configurations of home-ownership and home rental. The configuration would not be set in stone. The jigsaw puzzle would reshape itself continuously under the impulse of changing market conditions. In consequence, house prices and rents would maintain a healthy market equilibrium that facilitates household mobility in response to changing job-market signals.
Unfortunately, in the United States, political rather than private market forces control the distribution of properties between home-ownership and rentals. Perceived vote and interest group pressures, fueled by a climate of political correctness, drive congressmen, senators and presidents, of whichever party, with the support of a typically proactive Federal Reserve, to extend home-ownership beyond sustainable levels, just as monetary greed drives university administrators to over-extend the level of student admissions. Such narrow self-seeking behavior provides a climate of deception in which households clearly unsuited to home-ownership enter into unsustainable, sub-prime contracts with financial institutions that respond foolishly to political pressure, only to find themselves under-water from the outset and on an irreversible path to foreclosure or bankruptcy with all the long-term bad- credit implications thus implied.
So, if this was the 2001-2006 route to the burst house-price bubble, that caused the 2008 financial crisis and economic contraction, why are President Obama and the US Congress now repeating the error as they thresh about to coerce unwilling financial institutions into writing liars’ contracts for unsustainable sub-prime mortgages in order to send out a political signal that the Making Home Affordable program is really successful. Perhaps they really enjoy the political latitude for socialism provided by the 2008 crisis and contraction, and want to create another, just for good measure, albeit in 2013? Or perhaps they will never learn:
“We have learned some things from comparable experiences of the 1930s’ Great Depression, perhaps enough to reduce the severity of the current contraction. But we have made no progress toward putting limits on political leaders, who act out their natural proclivities without any basic understanding of what makes capitalism work.”
James M. Buchanan, Nobel Laureate in Economic Sciences 1986. Frontispiece to Economic Contractions in the United States: A Failure of Government by Charles K. Rowley and Nathanael Smith. September 2009 (www.amazon.com).
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