Not Change, More of the Same

Ignoring history is not the path to effective financial services reform

During the 2008 election, then-Senators Obama and Biden were fond of the line, “That’s not change, that’s just more of the same.” This quip would be useful in the House financial services debate.

In last week’s first round of discussion on the House floor, special interest groups won a few concessions in the form of amendments they couldn’t get added into the bill during committee. One in particular stands out:

members of the Congressional Black Caucus signaled they would withdraw support for the bill if minority communities hard hit by the recession didn’t get economic assistance. The bill now contains $3 billion they sought to help unemployed homeowners avoid foreclosure and $1 billion for neighborhood assistance.

The racial component here makes this understandably sensitive, but this is nonetheless the quintessential problem with the reform effort: it ignores the history of unintended consequences.

The desire to help homeowners is understandable. Unfortunately, in an effort to extend an assumed universal benefit-home ownership-lawmakers have done more to hurt their constituents than help them. The root of the problem is misguided compassion.

Letting compassion drive congressional policy is only beneficial when it also considers the unintended consequences of that policy. Since the 1960s, it has been government policy to promote homeownership amongst low-income families in America, particularly minorities. This translated into a government led housing bubble filled with “subprime mortgages” designed to help get those low-income families into homes. Homes they now can’t afford (because they never could). Homes they now need more government assistance to stay in. And largely because of the arbitrary social norm that says “homeownership is the American dream, without a home, you are less valuable in society.”

Why should we view those who rent or live in apartments as lesser in society? We are spending billions to maintain this arbitrary notion that has gotten us into deep trouble. Is is the very attitude that drove the request for $4 billion in extra homeowners assistance that promoted policies encouraging Fannie Mae and Freddie Mac to lower lending standards and lead the market in issuing riskier and riskier loans.

Over the past few years we’ve seen the problems continue with government policy intervening in the housing market. The First-time Homebuyers Tax Credit has been used by 1.4 million Americans to get a new home since 2008. That sounds great. It means more people have bought a home. It means the housing market can back on its feet. Right? Nope.

The Credit is skewing demand and delaying a sustainable recovery in the housing market. A survey by Wells Fargo in September said 56 percent of homebuyers this year probably wouldn’t have bought their home without the special tax credit. The result is that the “recovery” in housing (which is minimal anyway) doesn’t accurately reflect the real demand for housing right now. Within a year, we will likely see a sharp decline in housing prices and sales as the credits expiration reveals the true state of the market.

The reason for this isn’t hard to understand. Growth in housing starts and prices is based on demand stolen from 2010 and 2011. Like the Cash for Clunkers program, the Homebuyers Credit just shifts home purchases from the future to help the recovery numbers today. Every one of those 56 percent of homebuyers represents a home that won’t be bought next year or later; it’s not an organic, stable resurgence of housing demand.

And that is the ultimate problem with subsides like the one pushed by the Congressional Black Caucus. It perverts recovery in the name of helping in the short-term. The $4 billion in aid will probably help some real families avoid frustration and complications in the housing market today. But only the short-term. More people will be impacted by the way that money perverts demand, supply, price, and affordability in the market place.

We simply need to look back at history to see where well-intended policies have gotten us, and then look to the future at what unintended consequences the policies of today might bring.