Challenging a Consensus

The consensus on Capital Hill is that FHA, Fannie Mae and Freddie Mac are vital to a healthy housing economy. And, consensus is that their roles shouldn’t be reduced by much until the housing market is strong enough to stand without them.

In other words, the Government will continue to prop up home prices as long as they have to. Proving, yet again, that the consensus continues to confuse the cure and the disease.

Arnold Kling writes:

Old consensus: we need Freddie and Fannie in order to make housing “affordable.”New consensus: we need them in order to “prevent further house price declines,” in other words, to make housing less affordable.

I have to question this consensus. It reminds me of the consensus that “We should someday deregulate oil prices, but not now” that prevailed in the late 1970′s. President Reagan rejected that consensus, ripped off the Band-aid of oil price controls as soon as he took office, and the consensus now is that he was right to do so. I have been arguing since early in this crisis that we need a similar approach in housing.

Markets achieve a spontaneous order. The opposite of order is disorder. Price controls in the oil market created disorder, to the point where fights broke out in lines at gas stations.

Government interference in housing markets, which helped produce the disorder known as the financial crisis, is still producing disorder. When houses are “owned” only because the government is supplying lenient, subsidized credit, that is disorder. Given this disorder, rational people do not wish to buy. The rational person wants to buy low, sell high, not buy when the market is rigged to try to keep prices higher than they should be.

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The consensus that this policy is necessary has to be questioned and challenged until somebody like Reagan comes along and stops it.