Wednesday, July 20, 2011

The fastest road to hell is paved with government's good intentions

We've all heard the phrase, "The road to hell is paved with good intentions." The corollary to that should be that the fastest road to hell is paved with government's good intentions. Nothing but government has the power to take a good idea too far and turn it into an albatross around everyone's neck.

Obamacare is one obvious example. Nation building in Iraq and Afghanistan is another. High-speed rail in California or in the Midwest is a third. What usually happens is that government decides that something is a good idea and simply ignores the repercussions and costs of their actions. They don't stop to think about what Obamacare will do to small businesses' costs, or how many people will actually use high-speed rail in California, or whether the Iraqi and Afghan people will actually welcome us as liberators or not.

Perhaps one of the most powerful examples of government's good ideas gone bad is the National Homeownership Strategy, started by Clinton in 1994 and continued under Bush (see this BusinessWeek article for a full discussion). Basically, government decided that it was a good idea for more people to own homes. Here is an excerpt from the plan:

For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.

Translation: Many people wouldn't be able to afford mortgage payments, but it would be a good idea if they were able to buy homes anyway. So we need to use "creative financing strategies" (such as sub-prime lending) to "address these financial barriers."

Even "creative financing strategies," however, cannot make money appear out of thin air. So what happened? A lot of people bought homes with mortgages they couldn't afford. At the urging of government, many of these shaky mortgages were purchased by Fannie Mae and Freddie Mac. Eventually, starting in 2007, lots of people began defaulting on these mortgages. Fannie Mae and Freddie Mac collapsed. And the rest, as they say, is history.

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