Thursday, February 26, 2009

Let's learn from our mistakes and then repeat them anyways!

There were many causes of the current economic downturn, but one of the major causes was the fact that Fannie and Freddie (Frannie) grew from packaging traditional 20% down, 30 yr. mortgages to packaging more mortgages that were sub-prime and Alt-A. The government subsidies that Frannie received allowed them to become the biggest player in the mortgage backed security arena. I don't want to sound too naive, but government intervention into the mortgage business encouraged risking lending (to avoid 'red-lining') and led to a concentration of the mortgage market into two (unofficially) government backed companies.

So, a great lesson to learn from this is that by keeping rates artificially low ("below what the market will bear"), bubbles start to form. You've seen it with artificially low mortgage rates, artificially low Fed interest rates, artificially low rent prices (rent-control), and artificially low 'anything else'. Any manipulation in the market leads to some consequence down the road. Synergies cannot be created by an institution that does not face long-term incentives. The government does NOT face long-term incentives. They face elections, every 2/4/6 years. That is not sufficiently long-term. (Note: I am not advocating for longer terms!)

Not everybody agrees with me. Utopians, for example. Some people believe the government can fix the problems. Some people believe the government is one big synergistic entity. Despite what history has shown, Utopians hold out for this false sense of economies of scale. They say, "Let's give government more power, let's make government bigger; only then will government be able to see the whole picture and truly fix the problem." I present to you, the next step in the Utopian's journey

President Barack Obama is urging an end to government subsidies for student loan providers such as Sallie Mae and Citigroup Inc., with the government becoming the sole provider of federally backed college lending.
While at first I was hopeful to see the ending of government subsidies for student loans, I was heartbroken to see that power transfered to the Department of Education. I'm sure the people of the Department of Education are all well-meaning folk that want every American to have access to a college education, but sans competition to establish market rates for lending this is either a) a bubble in the making as credit is extended too cheaply to students; b) a burden on students who's rate's will be above a naturally established rate; or c) a giant transfer of wealth from the truly poor to the middle and upper-class. Remember, every inefficiently spent dollar towards promoting college education in one dollar taken from social programs that aid those in desperate poverty. But, then again, I guess the new Administration can just either go increase taxes (potentially, again) on the most efficient class or lower the threshold of the "classifiably rich" from $250,000 to (reportedly) $208,850 to an even lower (hypothetical) $175,000, to some amount that leads to socialism. (Note: I do not believe Obama is a socialist)

Then again, why exactly are we proposing that standard 4-year colleges and universities are the best path for every student. I don't expect it to happen anytime soon, but it has become one of those 'conventional wisdoms' that college is the best 'next-step' for every high schooler. If we really wanted to be innovative, let's look at trade schools, apprenticeships and other non-traditional forms of education. But that, my friends, in another talk for another day.

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