Tuesday, October 27, 2009

Costs Of Stimulus Far Outweigh The Benefits

Moses Kim argues that by subsidizing deeply underwater mortgages, the government is unfairly bailing out those who made unwise investments and undermining the free market system. Moreover, the costs of the bailout seem to heavily outweigh any benefits. See the following post from Expected Returns.

The government continues to recklessly waste taxpayer money without any measurable effect to our economy. The post cash-for-clunkers hangover effect on auto sales has now made it clear to most observers that the program was a failure. Housing is also receiving tremendous support from the government with similar dubious results. From the Washington Post, refinancing lifeline fails to reach most 'underwater' homeowners.
A seven-month-old government program to help homeowners with little or no equity refinance their mortgages has so far reached fewer than 3 percent of those targeted, with many struggling borrowers deciding that the benefits of a new loan aren't worth the closing costs.

This lackluster performance reflects the difficulty of helping the growing segment of "underwater" homeowners -- those who owe more than their home is worth.

The program is a key component of the Obama administration's efforts to stabilize the housing market and arrest the nation's growing foreclosure rate. But the initiative has received far less public attention than its companion, a loan modification program that pays lenders to lower the payments of delinquent borrowers who are in imminent danger of losing their homes.

The skewed logic behind subsidizing deeply underwater homeowners is similar to the screwed up logic behind bailing out "too big to fail" companies. A functioning free-market system demands accountability for failed investments- otherwise, the resulting moral hazard guarantees the perpetuation of crises in the future.

Level 1 Economic Thinking Masks Inefficiencies

During a recent conference call with reporters, Treasury Secretary Timothy F. Geithner noted that, with mortgage rates near historic lows, 3 million homeowners had already refinanced this year. That refinancing boom pumped $10 billion in purchasing power into the economy, chimed in Shaun Donovan, secretary of the Department of Housing and Urban Development.

But those benefits have yet to trickle down.

"The government is spending a trillion dollars to drive mortgage rates down, and it's been successful. But who is taking advantage of that? The people with the best credit and best equity. Not the people on the fringes," said Bob Walters, chief economist of online mortgage company Quicken Loans.

You can be sure that the government will focus only on the billions of dollars that have been pumped into the economy and not the costs. However, someone needs to bring up the asymmetric relationship between inputs and outputs here. Even a 2nd grader understands that spending trillions of dollars to bring about billions of dollars in benefits is not good economics.

Frederic Bastiat's parable of the broken window beautifully illustrates the faulty logic behind statists' arguments for government intervention. In short, statists argue that broken windows have a net positive effect on the economy since so many jobs are created to fix the broken window. This is level 1 economic thinking at its finest- just focus on benefits and not costs.

The modern day equivalent of the statists in Bastiat's day are the Keynesian economists that litter the Obama Administration and college campuses across the country. The government, primarily through the manipulation of interest rates, creates malinvestments and imbalances in the economy that always get addressed through shocks to our system. Government intervention has gone a step further through the monetization of debt, which is a move that will bring shocks to the system that will be far greater than anything we've experienced thus far. Someone needs to ask: what are the costs to government intervention? The costs are quite clearly being reflected in the dollar.

The example of the Great Depression makes one thing clear: the more the government intervenes in the economy, the longer recovery will take. As the masses start to realize that "green shoots" are utter nonsense, expect the government to blame it on not enough stimulus. Ironically, the same government and banking clowns that got us in this mess in the first place are going to garner more power.

This post has been republished from Moses Kim's blog, Expected Returns.
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