Why Government Involvement Is Bad

Foreclosure statistics were reported this morning on CNBC and were just dismal.  In California, where things were just absolutely out of hand in 2006 and 2007, with 800 sq. ft. closets selling for $500,000, foreclosures are up 100% compared to last year and 500% compared to the year before.

They had some clown on to comment on this – he wasn’t actually dressed as a clown obviously but he must secretly yearn to be a clown given the quality of his thought processes – and this clown said “Obviously the reason this is happening is that the [government] programs in place are having no effect [on supporting the housing market]”.  Come again?

First let’s get one thing straight.  The reason that foreclosures are so high is that many many people have signed up for mortgage loans that they can in no way afford to pay.  This inability to pay on the part of large numbers of mortgagees was estimable a priori.  Anyone who did not see it coming should join the CNBC commentator in the circus.

This perversion of thinking is a dramatic illustration of why it is a bad idea to have people come to believe that the government should or must be involved in matters of the economy that were previously left to private actors.  They then also come to believe that when things do not go well it is because the government is not doing enough and that of course the solution is for the government to do more.  They do not then understand that markets have to clear before they can work cleanly again.  Anything that prevents markets from clearing only delays the fact and prolongs the pain, almost certainly increasing the aggregate pain.  There may be slight things that can be done with a light touch that will not perturb this process too much.  But the more the mindset takes hold that government is an acceptable and even necessary economic actor, the more likely it is that the hand will be far too heavy, and therefore ultimately damaging.

Did we not learn this lesson in the 70’s?  There is a reason that the popularity of clowns has waned over the years.  Clowns represent a mask on reality.  They are creepy –  viz. the etrade commercial where the baby underestimates the creepiness of the clown he hires with his trading winnings.  My kids have no time for clowns.  Clowns try to appear to be something they are not.  Like the government trying to be an economic actor.  Something it is not.   Apparently we have already forgotten this lesson which we had apparently learned only 30 years ago and now we have elected people who are ideologically inclined to have the government do more and more.  We will pay the price.   Beware of scary government-is-the-answer clowns.

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