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Source link: http://archive.mises.org/7511/one-thing-we-all-agree-on-price-controls/

One thing we all agree on: price controls!

December 5, 2007 by

The Bush administration wants subprime price controls. So does Hillary.

{ 21 comments }

Bush never ceases to unimpress!!1 December 5, 2007 at 5:50 pm

I can not believe I voted for this guy. He has this country in wars it can’t win and at the first sign of any problem he jumps into the INCREASE GOVERNMENT MODE and does nothing but make matters worse.

The funny/sad part is that Hillary’s policies are so close to being the same that I really can not tell their policies apart.

Contrarian Investors' Journal December 5, 2007 at 6:17 pm

We should add the Chinese into the ‘honour’ list of price controls. See the results of their price controls.

Mark December 5, 2007 at 6:22 pm

how about some Austrian analysis of what kind of side-effects might manifest from these price controls?

David C December 5, 2007 at 7:45 pm

Mark, my guess would be that since price controls almost always cause shortages, price controls on interest rates will cause a shortage on credit. Of course, half this problem was caused because credit markets (over saturated with freshly printed up and loaned out money) locked up to begin with.

Normally, this is where I would say they are taking a bad situation and making it worse. The only problem is we are already in the worst credit market disaster in US history. It would be more accurate to say they are turning a mega mega disaster into a mega mega mega disaster in a mega hurry.

Jim Fedako December 5, 2007 at 9:59 pm

Dang! I should have bought a bigger house. Turns out I could have afforded the teaser rates since they are now bound to freeze.

Yancey Ward December 5, 2007 at 10:33 pm

My guess is that, in the end, it won’t matter. The defaults will keep coming. However, it is good to know just how stupid our leaders are.

nick gray December 5, 2007 at 11:30 pm

When our australian Liberals imploded and let the socialist Labor Party into power, some people wondered if it was all just a cunning ploy of some kind. Now I see why Howard wanted to leave when he did! The Australian Economy is affected by what the American Economy does, so we’ll collapse when you do! PM Rudd will be left with a dying economy on his hands, and will be kicked out by a resurgent Liberal Party at the next election! If only the republicans could plan like that, America might have a brighter future!

TokyoTom December 6, 2007 at 12:13 am

Our government – the gift that keeps on giving!

Ben December 6, 2007 at 3:44 am

Mark, my guess would be that since price controls almost always cause shortages, price controls on interest rates will cause a shortage on credit.

Well, it depends on whether the price control in question constitutes a floor or a ceiling; ceteris paribus, the former tends towards gluts while the latter tends towards shortages. The determination of a floor or ceiling is a little tricky with interest rates dictated primarily in an arbitrary manner via monetary policy and constantly skewed away and toward the natural rate of interest, which can only really be estimated indirectly based upon Austrian analysis of market conditions via business cycle theory. Without the stats in front of me I can only really generalise, but with the market expectations leaning towards a further rate cut by Bernanke next week, and the general consensus by those with their economic heads screwed on straight being that interest rates are still too low, it’ll be interesting to see what eventuates.

If only the republicans could plan like that, America might have a brighter future!

Hah, I like your optimism, Nick. I have a similar theory regarding the Libs’ appointment of Turnbull as Shadow Treasurer as opposed to Opposition Leader. In a few years time, Turnbull can challenge for the leadership, swing in on a vine, accuse Labor of stuffing up the economy just as he’d warned and become PM in a landslide. Of course, the fundamental assumption of Democracy is that the majority of the population know what’s best for themselves. Sometimes I wonder…

kurt December 6, 2007 at 8:25 am

Why should anyone continue to pay their mortgage dues, if they know government will ‘bail’ them out when they fail to pay? What kind of society do you get, when politicians actually entice this kind of impaired behaviour?

mike December 6, 2007 at 9:20 am

Cui bono? If freezing the teaser rate for certain mortgagees is good for the debtor (obviously) and the lender (better to keep the cash flow at the lower rate than take an overvalued house at the higher rate), then what need for govt intervention? If this is bad for anyone, it would seem to be the lenders, who should be screaming about the money they are losing from below market interest rates forced on them. Yet they have been silent so far. Something is up with this that has not been reported yet. There must be some hidden payoff to the lenders. And that likely comes from the wallets of all of us.

One consequence of this plan could be zombie homes (like zombie companies in Japan). None of these borrowers will be able to sell because the purchaser will not get a teaser-rate loan. At market loan rates, the home price will be suppressed, likely below the principal of the loan. The borrow will not be able to sell. And if it is a non-recourse loan, why would the borrower not just walk away?

John Bigelow December 6, 2007 at 9:43 am

The plan is to just keep the sub-prime borrowers paying interest for a few more years and then they lose the house.

George Gaskell December 6, 2007 at 9:48 am

Artificially low interest rates do not lead to shortages the same way that price caps affect commodities.

Price caps in commodities markets cause shortages because the cap applies to the tail end of the production chain, i.e., at the retail level. The caps cause an increase in consumption. However, the price caps do nothing to increase production. So, with steady (or reduced) production combined with increased consumption, you get a shortage.

With our central banking system, there is no such thing as a shortage of money-production. (Not a naturally-occurring one anyway.) They just keep printing and printing. Most of the new money is in the form of bookkeeping entries anyway, so it costs them nothing to create it.

An artificially-lowered mortgage interest rate means more consumption of housing, which in turn means continued skyrocketing inflation in the housing market. Housing prices are already increasing at triple the rate of inflation as to everything else.

In other words, this disastrous proposal is not so much a form of price-fixing as it is yet another form of easy credit and expansion of the money supply. Instead of expanding money generally, it’s an expansion of money tied specifically to housing.

Considering the importance of housing in our lives, it will cause the same problems that all other forms of credit-expansion always cause.

Person December 6, 2007 at 11:30 am

Just a “heads-up”, guys. This isn’t a “price control”. It’s “retroactive rewriting of a contract”. Price controls are when you say, “you can’t lend money above x%.” What’s happening here is “Those guys obligated to pay you $1500/month starting next year? Well, the contract now says $800/month. Deal.”

As far as I can tell, these plans don’t say anything about interest rates on new mortgages.

It’s blatantly unfair, but let’s not call it something it’s not.

In other news, I don’t understand what “teaser rates” means here. Is it talking about the ultra-low rates that shoot up after a month? Is it talking about the slightly-low rates that adjust after a year or so? Is it talking about the interest rates that aren’t really interest rates because the balance increases even if you pay the interest, and thus should actually be called the “payment rate”?

IMHO December 6, 2007 at 1:45 pm

Just watched the President’s and Treasury Secretary’s press conferences about “resetting” mortgages. Basically, this will teach people that no matter how badly you screw up, the government will “strongly suggest” that the lenders rewrite the contract for you. There will be no incentive for prospective homebuyers to reduce risk in taking out a mortgage, because the government will “strongly suggest” that the lender be there to catch them when they fall.

There was a panel discussion going on. Someone was saying that there were too many homes on the market and that it was not a good thing. That it would be even worse if people were allowed to default on their mortgages. In almost the same breath, he began to talk about the need for affordable housing. Well, if there were more homes on the market and interest rates were to increase, then the prices of homes would drop, thereby creating affordable housing…yes?

kurt December 6, 2007 at 2:58 pm

@IMHO
Indeed, affordable to whom? Those people who are failing at paying their dues had their chance, they failed. They should have known better. They should have been less greedy.

@Person
The problem is that house prices will be kept artificially high by the plan, and that the US government (FHA) will underwrite these new mortgages.

IMHO December 6, 2007 at 3:12 pm

Kurt,

“Indeed, affordable to whom? Those people who are failing at paying their dues had their chance, they failed. They should have known better. They should have been less greedy.”

I can’t be sure if you were agreeing or disagreeing with my post. At any rate, I made it pretty clear that I did not approve of them bailing out greedy homeowners.

As for my comment about affordable housing, I was trying to say that if the government kept their hands off the situation, that the increase in available housing coupled with increased interest rates (and the rates would increase) would cause housing prices to drop.

Ed Bird December 6, 2007 at 4:04 pm

The economics of this are interesting as will be the fallout from this and the original debacle of the easy money loans. But from a constitutional point of view, what legal basis does the federal government have to freeze the rates. If I own a bond and the bank who originated the loan renigs on the contract (of raising the rates) can’t I sue the bank for fraud? Reason.com has a good article on this.

Ben December 6, 2007 at 5:14 pm

With our central banking system, there is no such thing as a shortage of money-production. (Not a naturally-occurring one anyway.) They just keep printing and printing. Most of the new money is in the form of bookkeeping entries anyway, so it costs them nothing to create it.

Good point, George. Hence my “ceteris paribus” qualifier. In modern fractional reserve-banking economies, the mechanics of price controls on interest rates would not apply. Besides which, I think Person has it right in that this constitutes more a legislated breach of contract on a massive scale than an example of price controls. In an environment where the debtor has greater legal recourse and protection in the event of a default, you would expect debtors to be more willing to take on relatively riskier debts, and the lenders less willing to lend. Where the legislation is applied to pre-existing loans only, as I believe in this case (I’m unfamiliar with the specifics), the bad investment is not liquidated and, as several people have mentioned, housing prices are maintained at an inflated level. Of course, this is a politically popular result (to the detriment of those who are actually trying to buy their first house, for example).

Paul Grad December 6, 2007 at 8:25 pm

If there’s one thing we learn from this entire situation it’s this: in this new modern world of government financial-manipulation of interest rates, the most imprudent thing an investor can do is to be financially prudent, while the most prudent financial strategy is to be wildly imprudent. Glad I finally learned my lesson.

“Life should be lived like a cavalry charge!”, and evidently so should investing.

Mark December 7, 2007 at 6:31 am

The freeze will apply to mortgages issued between January 2005 and July 2007 that are scheduled to reset between January 2008 and July 2010, said people familiar with the plan.

To be eligible, borrowers must not be more than 60 days behind in their payments, have less than 3 percent equity in their property.

The Devil is in the details.

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