Click here to listen to the broadcast of You Tell Me on Newstalk 600 KTBB, Friday, December 19, 2008.
With all of the news of the past weeks if I could I would wave a wand and the federal government would take a giant step backward. I mean a giant step.
The two biggest stories of 2008 are the home mortgage meltdown and the auto industry collapse. The federal government is neck deep in both. And look at the mess that has been made.
And I’m not talking about recent attempts by the fed to clean up the mess. I’m talking about the fed’s role in making the mess in the first place.
Why is the government involved in home mortgages? If I want to buy a house, I have to be able to pay for it in cash or I have to borrow the money. To borrow the money, I have to have lived my life such that a banker will have the confidence to make me a loan.
Bankers don’t make money until they loan money so they have an incentive to loan money to as many qualified borrowers as they can. Qualified means capable of and willing to repay the loan.
Not everyone is qualified. And those that aren’t qualified are unable to buy houses. To the extent that unqualified people want to qualify, they have an incentive to become educated and employable and responsible.
But not if the government steps in and mandates that banks loan money to people that otherwise can’t qualify.
But that’s exactly what happened. In 1977, President Jimmy Carter signed the Community Reinvestment Act, a law that forced banks to loan to customers they might otherwise have denied. In 1995, Bill Clinton by executive order put even more teeth in the Community Reinvestment Act. The resulting mortgage paper had to go somewhere and that somewhere wound up being Fannie Mae and Freddie Mac. These two government sponsored behemoths created a market for so-called sub-prime mortgages that served to take the paper off the books of the originating banks, making it possible for them to make even more loans.
When the loans began going bad, as they were destined to do, it put enormous strain on the banking system and we now find ourselves in a severe credit squeeze.
So get out of housing, Uncle Sam. Let willing lenders and qualified borrowers come together in a free marketplace.
The same for the auto business.
Let’s not talk about the proposed $14 billion bridge loan to the auto companies that failed in the Senate last week. The fact that such a proposal is even necessary lies in large part at the government’s feet. It’s about Washington politicians and bureaucrats trying to tell car makers what kind of cars to build and how to compensate those that build them.
The Detroit automakers have signed ruinously expensive labor agreements with the United Auto Workers union because they know that the UAW has enormous clout with congressional Democrats and that if they, the automakers, stood up to the union, they would stand alone. The automakers need to bust the UAW in order to compete with Toyota and Honda and others who have U.S. assembly plants in which the labor costs are much lower.
But if the automakers try to break the UAW, they will invite the wrath of Democrats in Michigan and in the U.S. Congress. There is a whole raft of law already on the books heavily tilted in favor of the unions and more would likely follow if the car makers stood up to the UAW.
Also with respect to car makers is Corporate Average Fuel Economy or CAFE. This law was passed in 1975 in response to the Arab Oil Embargo. The intention of the law was to force manufacturers to build cars that meet minimum gas mileage standards. The actual result is to force automakers to build cars that consumers don’t want and upon which car makers lose money.
Auto executive Bob Lutz compared CAFE to trying to combat obesity by making clothing manufacturers only make small clothes.
Again, the government has no business here. Consumers can decide for themselves via the price signals of a free economy how much a car will cost to operate and make their purchases accordingly. The government should let car makers build the cars that customers are willing to buy.
The economy is in a very painful period right now. I think the Congress should drop the tax rate or at least extend the Bush tax cuts. I think they should promise to stay out of the inevitable fight between the automakers and the unions and I think they should be looking for ways to reduce the role of the federal government, not expand it.
There is no problem that a politician cannot make worse.