NCPA - National Center for Policy Analysis


October 13, 2009

Back in the days of the Soviet Union, two Russian economists who had never lived in a country with a free-market economy understood something about market economies that many others who have lived under such economies all their lives have never understood.  Nikolai Shmelev and Vladimir Popov said: "Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others."

While this may be easy enough to understand, its implications are completely lost on many people in politics and in the media.  If everything is connected to everything else in a market economy, then it makes no sense to have laws and policies that declare some given goal to be a "good thing," without regard to the repercussions, which spread out in all directions, like waves that spread across a pond when you drop a rock in the water, says economist Thomas Sowell:

  • Our current economic meltdown results from the federal government -- under both Democrats and Republicans -- declaring home ownership to be a "good thing" and treating the percentage of families who own their own home as if it was some sort of magic number that had to be kept growing -- without regard to the repercussions on other things.
  • We are now living with those repercussions, which include the worst unemployment in decades; that is the price we are paying for increasing home ownership from 64 percent to 69 percent.

How did we get from home ownership to 15 million unemployed Americans, asks Sowell?  By ignoring the fact that there was a reason why only 64 percent of families owned their own home.  More people would have liked to be homeowners, but did not qualify for loans under the mortgage-lending standards that had been in place for decades.

Politicians to the rescue: Federal regulatory agencies leaned on banks to lend to people they were not lending to before -- or else.  The "or else" included not having their business decisions approved by the regulators, which could cost them more money than making risky loans.

Mortgage-lending standards were lowered, in order to raise the magic number of home ownership.  But, with lower lending standards, there were -- surprise! -- more mortgage-payment delinquencies, defaults, and foreclosures, explains Sowell.

Source: Thomas Sowell, "Magic Numbers in Politics; Pols will never learn that everything is interconnected in the world of prices," Real Clear Politics, October 13, 2009.

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