Tuesday, August 19, 2008

Conservative Rhetoric Wrong on Credit Crisis

I believe in the power of free markets, the importance of private property, and the necessity of limited government as much as anyone. Very few question my "conservative credentials." However, I have recently begun to question some of the rhetoric that is being used by many rather prominent proponents of free enterprise when it comes to the credit crisis.

In recent months I have had Steve Moore (Wall Street Journal), Jonathan Hoenig (Fox Business), Craig Smith (frequently on CNBC and Fox), Charles Payne (Fox Business), and others on my radio show and the topic of the mortgage situation will often come up. I typically agree with the experts on the vast majority of issues we discuss and they are among the most brilliant analysts in the media today. In fact, I even agree with them on their assessment of the sub-prime crisis, I just strongly disagree with their rhetoric.

In every case and without exemption, these authorities said that the crisis was simply due to a "large group of people who had no business buying a house in a first place" (almost a direct quote of several of those listed above). Conservatives are often accused of being elitist and it is due to statements such as this.

Who is it to say which person should qualify for a home or who should be a home owner? If you believe in free markets, that is the responsibility of the mortgage companies and other financial institutes that are willing to take the risk, not the government or pundits. However, it is also imperative that those companies take responsibility if things go wrong with the loan. The economy shouldn't have to suffer from the moral hazard being created when mortgage companies take risks and then get bailed out by the government. That will lead to businesses taking more risks, with the belief they will be bailed out in the end if it doesn't work out.

Because of the anti-consumer rhetoric being spoken by these free market thinkers, people who could get a loan no other way than through a sub-prime approach may never qualify for a loan again. Yet, the number of loans by such persons that are going into foreclosure are in the single digits. The majority of these people are pleased to own a home this way because they wouldn't have been able to get one any other way because they are self-employed. They had all the "business" in the world getting such loans, the financial institutions that underwrote them had no right to a government bailout. That should be the focus of conservative critics.

The results of this crisis are bailouts for the mega rich corporations and the future punishment of every person who needs variable interest rates loans in order to get a home. Some how, the latter is being projected as the "bad guy". Advocates of freedom should defend the individuals who were creative in their pursuit of their homes -- the vast majority who have kept up their payments. Those who couldn't pay should suffer the consequences. Meanwhile, the businesses who made poor decisions in whom they loaned money to should be allowed to suffer the consequences for their decisions. Heads should roll, companies should be purchased by others, and changes should be made internally. But prohibiting sub-prime laws publishes the wrong individuals.

The free market advocates at the beginning of this piece are largely right in their thinking. The government should not bailout bad business decision making. However, they were wrong in the rhetoric. No one, but the ones who make a loan, should say who is worthy of being financed. Not only does such rhetoric do nothing in winning hearts and minds to free market principles, it is contrary to the ideas of freedom itself.
Kevin Price's articles are found daily in national publications such as USA Today, Chicago Sun Times, and Reuters. Subscribe to his newsletter here.

Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review.

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Anonymous Anonymous said...

It's not that they shouldn't be buying a home... but that they shouldn't be buying a home they can't afford.

11:40 PM  
Blogger Kevin Price said...

Very few can "afford" to buy a home. The vast majority have to finance it. The ones who should determine this are the financial institutions and the people making the loans -- not the government. If the loan doesn't work out, the parties who made the transaction should be held accountable. The vast majority of Americans (including those with ARMs) have paid their monthly payments. Should they suffer for the small number who are in default?

11:59 PM  

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