Sunday, August 22, 2010

Idols of Housing

One of the great books on American culture written in the 1980s (and still timely today), is Herbert Schlossberg's Idols for Destruction. Schlossberg describes and critiques various forms of contemporary idolatry in American culture from a Christian perspective. Included are chapters about idols of humanity and idols of mammon.

As Schlossberg defines it
Idolatry in its larger meaning is properly understood as any substitution of what is created for the creator. People may worship nature, money, mankind, power, history, or social and political systems instead of the God who created them all. 
In this context idolatry is the setting up of some person, place, or thing, above Jehovah God, the only being worthy of worship and obedience. Schlossberg notes, for example, that those who would make an idol out of humanity "are hostile to any notion of law that is external to the legislative organs under human control and this means that morality cannot be predicated on universal codes." Those who would make an idol out of mammon elevates obtaining material possessions, such as a house, as the end of life.

Evidence of such thinking came out of a recent Treasury Department summit about what to do with Fannie Mae and Freddie Mac, those mortgage buying leviathans. Bill Gross, for example called for the complete nationalization of housing finance in the United States. Gross said
To suggest that there’s a large place for private financing in the future of housing finance is unrealistic. . .Government is part of our future. We need a government balance sheet. To suggest that the private market come back in is simply impractical. It won’t work.
Well then. So let it be written, so let it be done. Think financing housing is not a matter for the state? Your unrealistic. Worried about constitutionality? So anachronistic. Think that full nationalization of the housing industry might be less than economically wise? Who can say before the fact what the economic outcome will be? Concerned that such a matter violates the ethic of private property? We do not discuss such things in polite company.

For his part, Treasury Secretary Timothy Geithner sounded like the conservative. He said that the Obama Administration "will not support returning Fannie and Freddie to the role they played before conservatorship, where they took market share from private competitors while enjoying the perception of government support.” Alas, it appears that Geithner is asking for something contradictory. I don't see how a government sponsored entity can participate as a supplier in a market and 1) not take market share from private companies and 2) not enjoy the perception of government support. The logical policy to take from Geithner's stated perspective is to eliminate government involvement in mortgage finance altogether, but I am confident that he does not want that.

On the other hand, Mike Heid, co-president of Wells Fargo Home Mortgage, said that a government guarantee against catastrophic loss would help draw private capital into the housing finance market. Well I bet it would. As Heid correctly noted, however, the challenge would be "how to marry this government guarantee with the maximum use of private capital in a way that minimizes the risk to the taxpayer, encourages competition, and ensures no one institution is too big to fail."

In other words, how do we accomplish contradictory ends? How do we intervene to provide government guarantees in such a way that private capitalists will act accordingly while at the same time not act accordingly? If we promise them guarantees against catastrophic loss that will draw them into this market, but that same promise will also give them the incentive to take on much more risk that necessarily falls on the taxpayer, not themselves.

In his book Meltdown Tom Woods has already done a masterful job explaining how Fannie and Freddie played a large role in creating the housing bubble that helped usher in the Great Recession. Because of such government sponsorship and the perception that they were indeed too big to fail, they drew much more capital into the housing market than there would have been otherwise. This is just fine for those whose chief end is to glorify home ownership and to enjoy four bedrooms and two-and-a-half baths forever. Those who understand economic law, however, recognize that such intervention has had and will always have serious negative consequences.

Gross and company demonstrate the flight from reality, what Schlossberg refers to as pathology, of the idolatrous. Notice the implicit ethical criteria--whatever brings back the housing market trumps everything including economic law, civil law, and moral law. There was nary a suggestion that trying to reap all of the benefits of the market through government intervention cannot succeed because of economic law. There certainly was no discussion about how such policies would obliterate private property in housing finance with obvious ethical consequences. When we place anything above the law of God, however, we engage in practical idolatry and are playing with some serious fire.

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