Who Did This To You?

A reader writes to The Daily Dish:

“I lost my job in May. I finally got an interview with an out of state firm last week. The thought of moving my family across the country was hard enough to consider. They made me an offer. It would be a cut over my last job but still it would provide health insurance – heck they even would chip in on living expenses. Talked to my real estate agent today. We are under water by about twelve thousand. My choices are stay unemployed or walk away from the house. I have till tomorrow to make this choice.”

Anyone with half a heart, or the requisite amount of rational fear, should want to know why this had to happen.

In a normal world, money is a precious metal, that is, something whose supply is not easy to modify at will, and numbers indicating quantities of it are used to represent information about supply and demand for other things through a thing called “the price” which is associated with all commodities (except love, natch). By exchanging it for everything, we come to know the comparative value of everything, which is otherwise incredibly hard to do. (Suppose you are bartering apples for oranges. How do you know how many apples an orange is worth, or vice versa? Knowing the price of each, and arithmetic, will tell you).

Sometimes we want something but it’s really valuable, and we don’t have anything of equivalent value to swap for it. But we will, or gradually over time we will. Then what we need is to have someone give us some of the precious metal, in exchange for a promise to give it back later, plus some. (Why plus some? Why do we charge, and pay, interest? Well, if you have some, what incentive do you have to give it up, and all the opportunities to buy in the present that go with it?). How much plus some? Well, supply and demand apply here as well: if not very many people are borrowing, then someone who makes their living by lending will have to lower the price of the loan, the interest charged on it, because if the interest is too high, no one borrows, and lenders don’t eat. If you set the price too low, borrowers will got nuts and borrow a lot.

However, once you have paper money printed by the government, this gives your society a lot of flexibility, a lot of opportunities for the government to fiddle with the economy, because it can determine at any given time how much money there is, just by printing some (by contrast, there is no “just by making some” if someone wanted to determine at a given time how much gold there will be).

If the government doesn’t think there is enough economic activity, it can do a couple of things. One is to print a bunch of money and put it into circulation. This makes people initially think that they have more purchasing power, so they buy more stuff, others make more stuff, hire more people to make stuff, etc. But in the end increased demand for goods also follows, inexorably, the law of supply and demand, and prices go up. Since all demand has been stimulated, all prices go up. This is called inflation. It happened some here in the 1970s, but a lot in Germany in the 1930s, and a lot in Zimbabwe now, which is why people with a healthy sense of fear people are now reluctant to do this.

Another thing government can do is it can spend money itself, it can be the demand for goods and services, and then people respond to that purchasing activity by making goods, providing services, taking the money they get from the government for them to buy goods and services in turn, etc. etc. which is nice except that the government has to get this money either by taking it in taxes, which defeats the purpose because it takes money and purchasing power right back out again, or by borrowing it, which means taxes will have to go up eventually, with the same unfortunate effect, only later. Guess what we’re doing now.

Another thing you can do with paper money is the government can decide what interest rates will be charged, which determines how much borrowing happens, in two ways. First, if the rate is high people are less likely to borrow; if the rate is low, more. Second, whatever the government as lender does tends to get imitated by other lenders.

So, a few years back, the government (or more precisely, the Federal Reserve Board) decided it wanted a lot of economic activity (the immediate cause of this seems to have been fear brought on by the collapse of the dot.com boom in the 1990s). Having already decided that government spending and indebtedness is bad, and inflation is worse, it did so by setting interest rates really really low (not as low as now, where we are all but paying people to borrow money, but pretty low), this being the only remaining device for making stuff happen.

Now it is Econ 101 that when you set prices lower, you create more demand. This is common sense: people are more likely to do something if the cost of doing it is less, all else being equal. So the cost of borrowing money got lower, a lot lower. The result is that more people borrowed money, and more people bought things you can only buy on credit because they are so expensive, thus increasing the demand for those things, and thus running their prices up.

Like houses. You know the rest of this story.

Who made the decisions that led to this feeding frenzy in the housing market? Alan Greenspan, the top honcho at the Federal Reserve Board, and author of (irony alert!) a popular article titled “Gold and Economic Freedom,” in which he argues that paper money is a bad idea because it gives the government the power to tinker with the economy in ways that are at least manipulative, often with unexpected or untoward results, sometimes catastrophic ones.

Ah, yes. Cue Alanis Morrisette.

When the housing bubble burst and the economy collapsed, scads of people like the reader supra were left with houses they now couldn’t sell if their lives depended on it, and certainly not for what they paid, and the massive unserviceable debt that goes with it, all because they feared that if they didn’t buy when they did, it would only get more expensive to buy a home later. So they will abandon the home to foreclosure, because this is cheaper than selling. The foreclosing bank will be unable to sell it except for a loss. Banks taking a hit will be afraid to lend to anyone including businesses which need operating capital, and the whole economy will screech to a halt.

So that is who did this to you. Alan Greenspan.

If you ask Democrats, they will tell you that this was all caused by wheelers and dealers buying and selling to each other the massive amount of bad debt floating around, because where the bad debt itself came from is a complete mystery, it couldn’t possibly have been caused by the price of debt because how on earth could the price of something influence the likelihood that people will buy it? and anyway you can’t politically demonize the borrowers, the regular folks who just want a home, and it’s almost as awkward to demonize the lenders for giving them money, and at the least onerous interest rates in the history of money. Isn’t lending on generous terms God’s way? Isn’t that the moral of It’s a Wonderful Life? This is all called “misdirection.”

If you ask Republicans, they will tell you that this was all caused by bleeding heart liberals who created government programs like Fannie Mae and Freddie Mac which made it somewhat easier for less well off people to buy homes, so that they can run campaigns against big government, and hopefully thereby, get to control it for mysterious purposes of their own (if you think that that purpose is to cut spending, ask why they didn’t, when they controlled all three branches of government awhile back–they were too busy massively increasing Medicare spending while preparing campaign ads against “socialized medicine”, the first to keep them in office, and if that failed, the latter, to get them back in office). This leaves unexplained how Fannie Mae and Freddie Mac caused a boom in Hong Kong office space, and so I would say this should also be called “misdirection.”

Frustrating, no? But what to do? Well, get good and angry, for starters. But who at?

I know! I know! Hispanics! Muslims!

Three guesses what I call that.

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One comment on “Who Did This To You?

  1. Pliny the Elder says:

    One need not be D.H. Lawrence to reject the self-pity on the initial mail. In my neighborhood being underwater by only 12,000 is considered solvent (and lucky). I am also unclear as to why a short sale or deed in leu of is off the table. But I digress.
    Criticizing various policy choices made by the government is, of course, always the right thing to do. However, there is alos a sense in which we did this to ourselves. (I regret buying my home when I did, but am happy that I did not buy six months later. I would ahve spent another 10,000 and would be even more upside down now.) People were offered the opportunity to do somehting expensive and chose to do so. This is no different than the hipsters hanging out in Portland with $100,000 (or more!) in student loans. Not everything the government helps you with is a good idea. This is the sort of conclusion we expect folks past the age of 10 to reach. N.B. almost no one suggests bailing the student loan mega-debtors, even though their situation is in some ways very similar. Specifically, they now own an asset that the government helped them acquire which is worht less than anticiapted and resulted in a lot of debt. As Michael Walzer has observed, some bucks stop with each of us. I am not thrilled with my situation, but I am not whining. I came from a working class background and have lost more than anyone in my entire family ever. Even adjusted for inflation. That is progress of a sort. It is not, however, happiness.

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