Dan Indiviglio has an absolutely stunning post up that aptly illustrates the worst of the Washington/Wall Street business model.
He’s been attending the annual meeting of ASF, the securitization association, and reports on a panel that discussed that focused on the roll of government sponsored entities in the mortgage market. Here is a part of what he reported:
This is kind of amazing. What you have here is a group of investors and bankers who would prefer to keep the government propping up the market so that costs remain low. This idea spits in the face of free market economics. It would dictate that if the market demands a higher price for mortgage funding, then that’s what the price should be. Indeed, if recent history has taught us anything, then it’s precisely that: mortgage funding was entirely too cheap and easy. That’s what created the housing bubble. If costs were higher, then fewer mortgages would have been originated, and credit quality would have been better as well.
Also interesting is that all of these panelists essentially agreed that the two objectives of providing liquidity and making homes more affordable should be separate. But, in a sense, providing liquidity also makes homes more affordable. If something is more liquid, it has cheaper transaction costs. So if the government kept liquidity artificially high, then prices would be kept artificially low: it couldn’t escape the dual purpose of providing liquidity and also making home ownership more affordable, since banks’ funding costs would be lower as a result.
This is a great illustration of where businesses only support the free market until it costs them to do so. As soon as the realization that a privatized mortgage market liquidity provider might increase funding costs and decrease loan volume, all that great free market philosophy goes right out the window. After all, that could make Wall Street bonuses a little lower.
The truth is that there’s no reason the U.S. needs government-sponsored entities to provide mortgage market liquidity. Other countries leave that function in private hands, and their mortgage markets function perfectly well. Indeed, given the disaster seen in the U.S. mortgage market over the past few years, theirs may perform even better.
Surprised? Don’t be. The real estate industry knows that if you remove the interest rate subsidy their model tanks. They built it around volume and the only way to maintain that volume is with artificial interest rates.
But nothing could go wrong with that, could it? And besides, we can afford it, can’t we?
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