The “Do Nothing” Congress Cuts Both Ways

We’ve been hearing for the last couple of years that the Republican congress won’t do anything (with “do anything” defined as “unilaterally cave in to the President’s entire agenda”). But doing nothing cuts both ways. It’s not like the Democrats are proposing a raft of great laws that would save our country. And in many cases, they are opposing them for stupid reasons:

A high-profile Senate bill that would dismantle Fannie Mae and Freddie Mac suffered a blow this week when key Democrats decided not to support the legislation, likely wiping out its chances of advancing to the floor this year.

The bill has enough votes to pass the Senate Banking Committee, which plans to consider the measure next week. But the bill’s sponsors — Sens. Tim Johnson (D-S.D.) and Mike Crapo ­(R-Idaho) — failed to win over the committee’s liberal Democrats and secure a larger majority.

Without more support, Majority Leader Harry M. Reid (D-Nev.) is unlikely to move the measure to the full chamber, and its chances of gaining traction next year are unclear. The setback comes despite bipartisan support for the bill on the committee and suggests that the effort to revamp the nation’s housing finance system could stretch on for years.

The bill would gradually unwind these two behemoths and shift the risk back to the private sector, where it belongs. This has run into a firestorm of opposition from groups that want the GSE’s to loan more money to low-income groups as well as people who want to re-inflate the mortgage market and the derivatives market.

The liberal intelligentsia had been desperately trying to pretend that Fannie and Freddie — who controlled the lion’s share of the imploded mortgage market — had nothing to do with the financial crisis. They are wrong about this, cherry-picking the data that support their cause. But they are wrong on a more fundamental level as well.

The fundamental error is that encouraging poor people to buy houses is a bad thing. Not just bad for the economy, not just bad for the markets, not just bad for any of the reasons usually cited. It is bad for poor people. Buying a house for anyone is a marginal investment at best, unless it comes with a lot of land. I bought my house because I value the things that come with home ownership — stability, responsibility, possession — and because it is a form of forced savings. I also have a good credit rating so my loan was cheap. But unless you’re investing in rental properties, a home is a solid investment, not a great one. And it’s a terrible investment if you have poor credit, move a lot, have a shaky job situation or aren’t very good with money — traits that are very common among the poor.

Look at what happened during the financial crisis. Thanks to efforts to get the poor to buy houses, they had almost all of their wealth tied up in housing. When the bubble popped, it destroyed what little wealth the poor had:

The chart above splits U.S. homeowners into net-worth quintiles, and plots housing as a fraction of all assets for each quintile in 2007. For the poorest homeowners, houses were by far the most important thing they owned going into the Great Recession, making up almost 80 percent of their total assets. Another way of saying this is that the poor held very few financial assets such as stocks, bonds or mutual funds. On the other hand, housing was a much smaller part of the overall asset portfolios of the richest households — less than 20 percent.

So the poor were much more vulnerable to a crash in housing prices in 2007 than the rich were. In fact, it was even worse for the poor because they used so much debt to purchase their homes. Above, we also plot mortgage balance as a fraction of home value in 2007 for each of the net-worth quintiles. For example, if a household owned a home worth $100,000 and had a mortgage of $80,000, then the household would have a mortgage balance that was 80 percent of the home’s value.

Leverage can be a very dangerous thing for borrowers when their home values plummet. Continuing the example above, if someone has a $80,000 mortgage on a $100,000 home, and the home drops in value by 20 percent to $80,000, then the homeowner loses $20,000, or 100 percent of their equity in the home. Home prices fell 20 percent, but the homeowner lost 100 percent. That’s the effect of leverage!

The so-called “ownership society” encouraged this behavior under the belief that housing was a magical money maker that would turn poor people into rich people. Rich people own homes; therefore owning homes must make your rich. But it doesn’t and it never will. Owning a house is not a path to sudden riches. It is, at best, a sound investment if you have the means, the stability and the discipline.

Not that Fannie and Freddie have learned from their experiment in sucking away what little wealth the poor have. Just today, the overseer of the GSE’s announced that he wants to expand their role in the markets, to encourage people to buy houses and to not lower the caps on their mortgages. This is being done to “stimulate the economy”. But we’ve been down this road before. The only things that got stimulated were Wall Street crooks and mortgage sharks. Everyone else ended up getting “stimulated” right up the keister.

Enough. End this madness. End the GSE’s. Let’s not go down that road again thinking that this time, it will be different. If the President and his sycophantic media want Congress to “do something” I suggest they start right here with a bi-partisan effort to finally end this failed experiment.

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  1. ReganT

    There’s one thing I never understood about left’s cries of a “do nothing congress” and the “party of no.” When the dems boastfully claimed that federal spending is rising at the slowest pace in decades under Obama (a dubious statistic anyway), shouldn’t that credit go to the republicans? They make it sound like the republicans won’t let him do anything yet praise Obama for reining in spending! As if he wouldn’t have spent our money like crazy had they given him the chance.

    But yeah…end the GSEs!

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  2. Hal_10000 *

    When the dems boastfully claimed that federal spending is rising at the slowest pace in decades under Obama (a dubious statistic anyway), shouldn’t that credit go to the republicans

    THIS^^^ One of the things we kept saying during the last six years was that if Congress just stop spending more money, the situation would get better. Not good mind you, but not worse either.

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  3. CM

    I’ll certainly sign up to this one. I’m against allowing poor people to take out loans that they can’t afford. It seems so obvious….

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  4. Hal_10000 *

    CM, it’s not just a matter of loans they can’t afford. It’s a matter of loans not being a good idea when your job situation is unstable or your credit rating is poor. Even if you could afford the loan, it would still be a bad idea to invest in a depreciating asset that needs constant maintenance and has enormous transaction costs to acquire or get rid of. Government should not be encouraging this.

    I feel like we’re now chasing a similar chimera with higher education. If you graduate college, sure, students loans are still an OK investment. But if you fail to graduate, they are a financial death trap.

    If we want to encourage poor people to save, diverting some of their Social Security contributions into private accounts would be a better way. Banks accounts are portable and have minimal transaction costs.

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  5. AlexInCT

    I feel like we’re now chasing a similar chimera with higher education. If you graduate college, sure, students loans are still an OK investment. But if you fail to graduate, they are a financial death trap.

    I would hazzard that even if you graduate in the new economy we have courtesy of the class warriors and their wealth redistribution scheme, that these are too often bad investments. If you can’t find a job, or worse, you can only find jobs that you would have been qualified for without the education, going into debt to get these degrees was a abd idea. And lets not start the debate about how not every degree is equal (and I am not talking about the difference of a degree from one school or another, but about what you actually paid all that money to learn about). These days college seems to be the only investment people are content to pay premium dollars for, and then avoid getting any value from.

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