Now I'm going to prove it.
Today I'm talking about the housing market. It's broken. The truth is Congress broke it. Of course, it had help from mortgage originators, banks, and a deliriously greedy public.
But now, amidst all the rhetoric about class warfare, wouldn't you know it, some congressmen want to further grease the wheels of an already slippery housing market for a class of homebuyers I call the "middle-rich."
It's just plain stupid. And not only will it add to our housing woes, it's ammunition for middle-class Americans, who rightly recognize they are the biggest losers in a class warfare battle they never imagined would undermine the American dream.
A Good Idea Gone Terribly WrongWhat's being debated in Congress is the maximum size of mortgages that Fannie Mae and Freddie Mac can guarantee.
The previous maximum mortgage eligible to be backed by the Government Sponsored Entities (GSEs) was $625,000. In the aftermath of the credit crisis and housing bust lobbyists easily got that maximum raised to $729,750.
The increased limit expired on September 30, 2011. But the usual lobbying forces - in this case that would be banks, mortgage originators, realtors, home builders and financial intermediaries that trade mortgage pools guaranteed by taxpayers - are pushing to extend the higher limit until at least the end of 2013.
It doesn't make sense for the government, or taxpayers, to guarantee mortgages at all. The whole scheme, which originated in the Great Depression and made good sense at that time, should have been phased out decades ago. Instead, it mushroomed.
The idea is simple enough. In order to drive money towards housing finance, the government establishes "conforming" criteria for mortgages. When mortgages conform they are believed to be of a certain standard and quality and can be packaged into mortgage-backed pools. The government guarantees the payment of principal and interest on those pools. Investors buy the pools because they are guaranteed, and the money they pay banks and originators for the mortgages in the pools goes back to originators and banks, which now have more money to make more loans to more homebuyers.
Taken at face value this isn't a bad idea. But as is so often the case with even the best ideas, there are unintended consequences. In the case of the government guaranteeing mortgages, there are plenty of very negative unintended consequences, like "moral hazard," for example.
That's why, after the horror of the Great Depression had passed, government guarantee programs should have been phased out, so that private markets could freely price the risk of originating and holding mortgages.
Unfortunately, that didn't happen. That's why we find ourselves in the situation we do today.