Sergio Stefanuto
Joined: 14 May 2009
Location: UK
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 Posted: Mon Jan 11, 2010 5:51 am Post subject: Thomas Sowell, The Housing Boom and Bust |
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| Many of the "problems" which politicians set out to "solve" are bad consequences of previous "solutions" created by the same or other politicians. |
Example 1:
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| These include housing prices in some places that take half a family's income just to put a roof over their heads [government building restrictions being largely to blame for unaffordable housing]. Dealing with this problem by launching nationwide housing crusades to create "affordable housing" through mortgage lending quotas and riskier lending practices tries to solve one problem by creating another. The collapse of this "solution" now confronts the country with a still bigger problem for which yet a new "solution" is being proposed. |
Example 2:
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| However politically attractive interest rate ceilings might be, they make it less likely that lower income people will get loans. And if different ethnic or racial groups are disproportionately represented in lower income brackets, then interest rate ceilings virtually guarantee that they will be disproportionately represented among those turned down for loans. For politicians, however, this differential in mortgage loan approvals can then simply become another isolated "problem" in the market for them to "solve". |
Example 3:
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Perhaps the crown jewel of those who believe in government intervention in financial markets has been the Federal Deposit Insurance Corporation (FDIC), which guarantees bank accounts and thus has effectively put an end to runs on banks. There is no question that FDIC, by removing incentives to start a run on a bank by those fearful of losing the money in their accounts, has reduced bank failures.
But why was such a law necessary in the first place? Because of massive bank failures during the Great Depression. Yet what has seldom been mentioned is that a wholly disproportionate share of those banks that failed were in states with laws preventing a bank from having more than one location. A bank located solely in a wheat-growing community is exposed to all the risks of a fluctuating wheat market, since both its depositors and those to whom it lends are likely to include many people dependent on the price of wheat, which fluctuates in a world market beyond their control. But a bank with branches not only in wheat-growing areas, but also in steel-producing areas, furniture-making areas, etc., has more diversified risks, and therefore lower risks overall, since all these markets are unlikely to fluctuate the same way at the same time.
Larger banks with diversified risks, located in places where they were not constrained by state laws against multiple branches, had very low rates of failure. Almost all failing banks were in states with laws against branch banking. Meanwhile, in Canada, there was not one bank failure during the years when thousands of American banks failed - and the Canadian government did not provide deposit insurance. Canada had 10 banks with 3,000 branches across the country. |
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