The Road to Hell . . .

The proverb "The road to hell is paved with good intentions" isquoted by Jeffrey
Brown, professor of finance at the University of Illinois, inhis acclamation for
Thomas E. Hall’s book "Aftermath: The UnintendedConsequences of Public Policies"
(Cato Institute, 2014).

This book by Hall, a professor of economics at Miami University inOxford, Ohio, is an insightful and fact-filled treatise on how well-intentionedlaws and government regulations can too often generate destructive economicoutcomes, adverse political consequences and widespread and long-term societal damage.

"There is much more to generating good social outcomes than havingan interesting
policy idea," cautions Brown.

On the macro level, for instance, the Great Depression of the1930s, the recurring U.S. recessions and overall instability in the Americaeconomy have "resulted from poorly designed government policies," asserts Hall.

Most recently, the 2007-09 financial crisis clearly was linked tothe federal
government’s "fair" housing policies which produced an artificialhousing boom, a
subsequent decline in home prices, extensive personalbankruptcies and falling stock prices that coalesced to generate the loss of 8million jobs and a drop of $13 trillion in U.S. household wealth.

To promote racial egalitarianism in homeownership, Congress passedthe Housing and Community Development Act, a piece of feel-good legislation,ill-designed, that delivered mandates to government-sponsored enterprisesFreddie Mac (the Federal Home Loan Mortgage Corp.) and Fannie Mae (the FederalNational Mortgage Association) to purchase more low-quality mortgages.

This federal mandate for an increase in the number of high-riskmortgages produced a rising quantity of subprime loans — mortgage loans tounqualified and high-risk borrowers — in addition to increases in housing loansto low-income buyers. That produced increases in demand for housing and higherrates of inflation in home prices followed by falling housing prices andincreases in "underwater" properties as mortgages increasingly exceeded thefalling market value of houses.

"The Federal Reserve was also a big part of the problem" — thehousing bubble and resultant bust — "because it maintained low interest rates,which encouraged
Americans to borrow," reports Hall.

To meet the federal government’s "fairness" mandate in lending,"no-doc loans came into being," Hall explains: "No-doc loans were home loans toborrowers who were not required to provide documentation of their income orassets."
U.S. taxpayers eventually were corralled into picking up the tabfor this federal
plan of centrally engineered "justice" as mortgage lenders tohigh-risk borrowers
sold off their subprime and high-risk loans to financialinstitutions,
disproportionately to Fannie Mae and Freddie Mac.

As the high-risk and low-income borrowers predictably defaulted ontheir mortgages, the original lenders were off the hook and U.S. taxpayers gotthe bill as the federal government delivered huge bailouts to Freddie Mac,Fannie Mae and private banks.

The result? On top of a surge in negative-equity mortgages, Hallpoints to the
unintended consequences of the federal government’s ill-conceivedplan to deliver
more loan "fairness," greater racial "justice" and increasedhomeownership by way of high-risk loans: "Not surprisingly, the U.S. homeownershiprate dropped, and by 2011 was back to where it had been in the late 1990s."

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Ralph R. Reiland is an associate professor of economics and the B.Kenneth Simon
professor of free enterprise at Robert Morris University inPittsburgh.
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Ralph R. Reiland
Phone" 412-779-7583
Email: [email protected]