Why We Are Where We Are Today - Government Inefficiency and Meddling

I had a great discussion last night with a couple friends about our current economic problems. One friend is a Wall Streeter and the other is a cost accountant married to a teacher. The Wall Streeter specializes in trading debt of distressed companies, and one focus of his attention these days is the homebuilders. My other friend is a long time Democrat, but probably of the moderate variety. And just for more background, I have made a living in the real estate industry for 20 years.

The conversation turned to the housing bubble and its causes and why it will be years before it recovers. It is interesting that when you read the main street media, the blame is almost entirely focused on Wall Street. Naturally, this pisses off my Wall Street friend to the nth degree. He and I both know better.

In the 1990's under President Clinton, Glass-Steagall was repealed. This allowed the banks to get into investment banking and trading. With their inside knowledge on business due to their lending, this was thought to be huge boon to the banks, and it was.

Also, under both Clinton and Bush, home ownership was pushed hard. The government wanted more Americans to have the opportunity to own their own home. So, through Fannie Mae and Freddie Mac, lending restrictions were eased to the point of folly. I have a friend who is a residential real estate appraiser. At one time he appraised a house in a not so nice neighborhood that was under contract for $40,000. His appraisal was coming in at $20,000, so he informed the bank. The banker told him it didn't matter, because they had to make more loans in that neighborhood due to government regulation.

So, we had a government telling banks they needed to lend money to people who could never pay the money back. We had Fannie Mae and Freddie Mac backing loans of 100% financing to borrowers with low credit. Then we had Wall Street bundle these loans into mortgage backed securities that were sold and traded. We also had an extremely low interest rate environment due to the recession that began when the tech bubble burst. And voila, we have a new real estate bubble.

People began to foolishly expect 10% appreciation and more on their homes, and borrowed to the hilt. Now the market has collapsed and we have a substantial over supply of homes across the country.

The government, in its infinite wisdom, decides to try and spur demand through an $8,000 tax credit. People who could, took advantage of this, but it came nowhere near solving the problem. The problems of the real estate market were simply kicked down the road. Banks still have many under water loans on their books. The homebuilders got a huge tax break from the government at the cost of billions to taxpayers that is barely keeping them afloat.

To combat the collapse in the real estate market, the government came up with its TARP program at the end of 2008, to help the banks stay solvent. This was followed by the $800 billion+ stimulus program that the administration claims has saved 3.5 million jobs, while the unemployment rate continues to rise.

Here is why I am not a believer in government fixes. I have seen firsthand how inefficient government operates. Here in our town, the federal government has wanted to construct a new building to replace an existing building that became obsolete after the Oklahoma City bombing. I was hired to consult on the project. I worked on the project for three years and the government paid me hundreds of thousands of dollars. They hired other consultants for similar amounts and more. I was hired to help them determine the best site for the new building by determining values of various city blocks.

The local government desperately wanted the new building at a specific location where its development would help spur other economic development. The federal government officials who would occupy the building wanted nothing to do with that site because it was not near any of their favorite restaurants and other amenities. So, this political battle had been waged for six years at the cost of millions of dollars until the Feds finally did settle on that site where the local government wanted the new building.

I have to believe this kind of thing goes on all the time. Just look at the federal reaction to Katrina and the BP oil spill. Bureaucracy gets in the way and makes things worse.

The government has now created a new healthcare entitlement program at the cost of trillions after a stimulus package that has done nothing to jumpstart the economy. Yes, the economy is better than it was last year, but could it have been better? If instead we cut taxes and put off plans for a new entitlement program, business would not be scared to invest in new employees and equipment.

Government needs to get out of the way at times and let the markets take care of themselves. Unfortunately, it has not, and now we have a sluggish economy and a mountain of debt. Things are not going to get better any time soon.