by Jason Stotts
The advocates of government-guarenteed mortgages also forget what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government-guarenteed 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 defray the losses. They encourage people to ‘buy’ houses that they cannot really afford. They 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 with guaranteed mortgages), and may mislead the building industry into costly overexpansion. In brief, in the long run they do not increase overall national production, but encourage malinvestment.
Henry Hazlitt (from Economics in One Lesson) discussing, in 1946, what would effectively become known as “sub-prime lending” and how it can lead to devastating long term consequences. It’s not like the fallout from subprime lending wasn’t forseen, it was merely thought that to help the “less fortunate” now was worth whatever risk might happen sometime in the future.
In case you haven’t read it, I highly recommend it. I learned just as much from this one book as I did getting my BA in Economics (well, almost).