The advocates of government-guaranteed mortgages also forget that what is being lent is ultimately real capital, which is limited in supply [that is, land], and that they are helping [person] B at the expense of unidentified A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to ‘buy’ houses they cannot afford. The tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes the with guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase overall national production but encourage malinvestment.
- Henry Hazlitt in Economics In One Lesson, originally penned in 1946
Hazlitt's explanation of economics is very lucid. I firmly believe it should be required reading for high school students (along with "A Splendid Exchange."). You can bet J is going to be reading these books!
It is rather depressing to read explanations of why home prices are still yet inflated. Hazlitt mentions "in the long run" - and it has been a long run, indeed, with the state subsidizing the cost of housing for so long. Each time the bubble appears ready to burst, more desperate measures are taken to pump it back up (witness the $8000 tax credit). When will it all collapse? And will my money (denominated in American dollars) be worth anything when it does?
