The financial crisis brewing now is no different from 2008 when we tailored policy away from economics and toward equity.
April 24, 2023
By: Bobby Casey, Managing Director GWP
When organizing any institution, the north star of said institution must revolve around the most successful and high yield virtues.
Throughout human history, we were passing on our BEST practices: do this, don’t do that; do it this way, not that way. We learned things and passed it on to our progeny.
We had oral tradition that warned of things that were deadly or dangerous, methods and processes that were faster or better.
This was how we made life better and easier for the next generations. How to do life better.
Businesses have these too, what they call BS&Ps or Best Standards and Practices. Here is what we know delivers the best, most efficient good or service. Ask any factory manager about Kaizen or Lean Six Sigma methods. These are the elite methods by which production processes are built.
The whole point being, they want to be successful, with minimal waste. The worst employee still must uphold their minimum standards, and if they cannot they are warned and ultimately let go.
The same rule applies to government policies. The north star should be in policies that foster prosperity or at the very least doesn’t inhibit it.
Sadly, two major shifts in focus happened in the past century.
First, shifting away from economics. Second, shifting toward something called “equity”.
There was a Munk Debate on whether our best years are ahead. That is, whether we have improved on net or not. It featured Steven Pinker and Matt Ridley argued the proponency of the claim, while Malcolm Gladwell and Alain de Botton argued the opponency.
When faced with the matter of “climate change”, the proponents hearkened to economic analysis saying we could make improvements and ultimately address the climate issue over time. The opponents mocked them for citing economist analysis over those of scientists.
Simply put, the doom-and-gloomers do not think that economics has any real say in solving world problems of health, resources, poverty, or climate matters. They think the experts in those fields are better suited to come up with a solution.
Medical doctors are good at diagnosing a problem, and what can treat it. But they haven’t the first clue how to get it to market.
Climatologists and meteorologists can tell you about the weather and what’s happening. They also can diagnose a situation. But getting a solution to market, again, is not what they do.
Getting a solution to market is economics laced with ethics. We saw what happened in 2020 when neither were considered. It was a devastating blow to the economy not only in that moment, but even today we are seeing the fallout and paying for that.
The Green New Deal, likewise, is just a list of mandates calling for everyone do just get solar panels and electric cars, with zero consideration for how that will play out in the market. Where are the resources coming from? How will people pay for it?
Ana Kasperian from Young Turks, one of the most liberal programs out there, even peaked a bit on the costs she specifically has to bear to meet Green Standards.
“My issue is that we are forced to make all these changes that are a financial burden, a giant inconvenience, with little to no help.”
She balked at the idea of tax credits. She wants the government to pay for it. This is the economic question being ignored.
So here comes the shift toward equity…
The matter of student loan forgiveness is still in the courts, with a low likelihood of passing. This was funding the forgiveness of some student loans by those who either paid their loans in full or never took them out in the first place… which would be the working and middle class.
The loan forgiveness would be mostly paid out to lawyers and doctors… so the upper middle class.
There would be no throttling or end to federal student loans, nor would there be any accountability from the universities who have jacked up their tuition while lowering their standards. But we can still pretend like we helped the poor or the minority communities?
In the early 2000s banks were taking on subprime borrowers. 2008 was the fallout of that egregious mistake. The point of lending to subprime borrowers was an initiative out of the federal government to close the gap in home ownership racially and economically.
We found out very quickly that subprime was defined as such for a reason. And the defaults were enough to call for federal bailouts.
We softly chanted “never again” for about fifteen years until now.
How about we do something like the student loan forgiveness policy, only in mortgages?
The Las Vegas Review Journal editorial observed:
“The point of all this is to promote the progressive version of ‘equity’ — of course,” it said. “Poorer people, particularly in minority communities, often have lower credit scores, making it more expensive and difficult to get a housing loan. Transferring the costs of riskier loans to more credit-worthy buyers is supposed to level the playing field.“
The article goes on to say, notwithstanding the equity issue, this “solution” is punitive to the responsible borrowers and encourages lenders to increase portfolio risk.
The Federal Housing Finance Agency pushed for more “affordable housing”, so as of May 1st Fannie Mae and Freddie Mac will implement the Loan-Level Price Adjustments (LLPA) which will apply to newly originated loans as well as refinances:
Homebuyers with good credit scores will soon encounter a costly surprise: a new federal rule forcing them to pay higher mortgage rates and fees to subsidize people with riskier credit ratings who are also in the market to buy houses.
Mortgage industry specialists say homebuyers with credit scores of 680 or higher will pay, for example, about $40 per month more on a home loan of $400,000. Homebuyers who make down payments of 15% to 20% will get socked with the largest fees.
Under the new mortgage financing rules, homebuyers with riskier credit ratings and lower down payments will qualify for better mortgage rates and discounted fees.
Interest rates are over 6% right now. What do you suppose this is going to do to the real estate market?
To ignore economics is to ignore moral hazards. Institutions like government should not be building their polices with the poor as their focal point. Catering to poverty or poor results will lead to poor policy. Leveling the playing field is defining the objective criteria for anyone to play, rather than trying to offset those criteria on subjective grounds.
It’s not that I hate the poor or don’t want them to do well. It’s that it’s not the responsibility of everyone else to offset the cost of forcing that to happen.
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