Some Consumers Unable to Buy Caviar

Lately I've been reading numerous articles about the collapse of the "sub-prime" mortgage/loans/housing market, and the impact of this on the "alternative" loans market and even the broader market. Some articles or news items on TV covering this have been better than others, naturally. The ones that annoy me are the ones that lament the situation without asking the important questions of how we got into this situation in the first place. This seems to be yet another example of journalists becoming more and more lazy -- because I refuse to believe that news consumers (you and me) are not asking for this kind of information in news reports on issues like this.

The subprime loan situation seems to be at least in part another instance of government intervention in the economy producing unintended, negative side-effects. This is another Hardy-moment, "This is another fine mess you've gotten me into!" -- a quote that I have thought of more and more in recent years when considering well-intended government programs that end up doing far more harm than good (above and beyond the inherent violation of individual rights that they involve in the first place).

The banking/loan/housing industry is of course far from a laissez-faire capitalist system. On top of that, the government in the US has been promoting more and more home ownership for many, many years now. Well guess what? Not everyone has the financial ability to own a home. To do so, unless you can pay in cash upfront, you need a loan. To get a loan you pay interest and rate of interest must rationally be based on what kind of risk you represent to the bank giving you the loan. This is all very simple economics folks! The more the government promotes, subsidizes, encourages, etc., more and more people to own their own homes, the more risky loans are going to be made. As base interest rates rise, and if people do not have fixed rates, then the inevitable will occur -- people won't be able to pay for their loans, banks will foreclose on homes, and dreams will be shattered. This is a simplification of the current situation, but it captures the essence I think.

And this is entirely predictable of course -- again, it is basic economics.

As an example of the kind of news article I'm talking about, consider the one in last Sunday's Rochester Democract and Chronicle, titled "Not 'Sub', Not Prime" which ran on the front page of the business section. It is a story about those with "Alternative Loans", which are kind-of between "sub-prime" loans and regular mortgage loans. In particular, Matt Drouin is profiled -- a 23-year old who lived with his parents for a while (a brief while it seems) after college to save up some money to buy a home. Because has virtually no credit history -- since he is only 23 years old! -- he doesn't qualify for a regular loan, and can only buy a home with an "alternative loan" that has higher interest rates of course. (How many single 23-year olds own their own homes vs. rent apartments I wonder?)

So what annoys me here is... why is this news? Why does this warrant an article in the paper? I mean, some people are not in a financial position to buy XYZ -- so we report on it? Since when? I don't recall seeing articles with titles like "Some Consumers Unable to Buy Caviar", or "Some Local Residents Priced Out of the BMW Market", or "The Poor Find they are not able to Attend Football Games Every Weekend". Isn't this all obvious? If you are poor, you can't buy things that cost a lot. If you are young, you have no credit history -- and unless you have a really high-paying, secure job, you are therefore a major credit risk for banks. Ergo, you will not get a good interest rate on a major loan (like a mortgage loan).

The sub-title for this article was "Some home buyers must settle for 'alternative' loans". You can almost here the "sigh" being voiced in that subtitle -- as if, the world is unfair, and maybe, just maybe, something should be done about it.

Only buried on page four do we have the all-important point being made:

But the availability of subprime and alternative loans has boosted the nation's number of home owners, with 69 percent of households owning their own homes. "For the past two decades, the emphasis by our government has been home ownership," Nothnagle [local Realty giant] said.

Wow... 69% own homes? I knew the number was artificially high these days -- that is, not what the market would bear without government interference in various ways -- but I had no idea it had reached nearly 70%. We can all agree that owning a home is a good thing, generally speaking -- rather than throwing money away in rent, you are investing in property that you will one day own outright. But just because something is good in this general way doesn't mean that everyone, or even 70% of people, can just magically obtain it. Because the markets represent reality, government interference with them amounts to attempts to interfere with reality -- and that can only have consequences at some point down the road. The chickens come home to roost.

Making this same point recently was a brief Letter to Editor by David Holcberg from the Ayn Rand Institute from 3/30, titled Lenders are Damned if they Lend, and Damned if they Don't:

With 2 million homeowners defaulting on their mortgage payments, we are increasingly hearing denunciations of lenders for having loaned money to people who had no means of paying it back. But these denunciations reveal a disturbing double standard. For years, politicians pressured lenders to not discriminate against those with poor credit history and shaky finances. Now we have the despicable spectacle of politicians accusing lenders of not having discriminated enough and of having made too many risky loans.

Lenders are damned if they lend--and damned if they don't. Whatever lenders do, politicians seem to always find their practices objectionable, and will take advantage of any excuse to call for more regulations and increased political power over lending. Politicians should leave lenders alone, and instead of damning them, they should acknowledge their crucial role in making home ownership possible for so many people.