Housing Crisis

Lets imagine 4 groups of people: responsible rich people, responsible poor people, irresponsible rich people, irresponsible poor people.

Everybody wants a house. Banks won’t lend to poor people regardless of how responsible they are, but they’ll lend to any rich people, regardless of whether they are responsible or not (and the rich will not default even if they’re irresponsible).

The government sees many advantages to home ownership, so it decides to get responsible poor people to buy houses.

Since banks won’t lend to them, the government makes it much easier for poor people to borrow.

Who takes advantage of this? Responsible poor people make a decision about how they can pay off debts, and some of them are helped by the lower lending standards, so some portion of responsible poor take out loans. The irresponsible poor take advantage of the program no matter what, meaning they buy lots of houses.  This drives up the price of housing a lot. After a short time, housing prices rise so much that the responsible poor cannot afford housing anymore, so they stop buying houses. The irresponsible poor can’t afford it either but buy anyway. After a time, the irresponsible poor start to default on their loans, have their houses foreclosed, housing collapsed, yada yada yada, 2008 financial crisis.

A few things about this model. First, obviously there was a lot more going on in the 2008 financial crisis than this simple model. Second, it doesn’t say anything about whether the rich are more or less responsible than the poor; only that they have more money. There needs to be a certain percent of the poor who are irresponsible (or at least bad with money); I don’t know what that percent needs to be or what it was, but as long as there is a high enough percent of irresponsible people in your target group, a program like this is bound to fail.

Way back in the Bush years, there was a lot of discussion about the benefits of an “ownership society.” Basically, they saw that people who owned homes were much better off than those who didn’t. Obviously this screams correlation is not causation, but lets ignore that for a second. Let’s assume that home ownership really does magically make people more responsible. Does my model still work?

Yes. Even if, once a homeowner moves in, he moves from irresponsible poor to responsible poor, its already too late. He’s already made the decision and cannot easily back out.

Again, in our little model here, we basically hurt everyone, the rich have to pay more for houses, so they’re hurt a little bit; the responsible poor are probably effected the least, they couldn’t afford housing before and can’t afford it now, and the irresponsible poor now have debt and bankruptcy and foreclosure to think about. Also, the country is thrown into a recession; which is good for no-one. Its also pretty clear that the poor are hurt more than the rich are by this.

All of this is a really long winded way of saying that programs can backfire. Over my lifetime, the gap between the rich and the poor has widened. And I think that most or all of the programs we have designed to fix it do more harm than good.  I’m going to attempt to relaunch this blog while tackling this phenomena.

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