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While JP Morgan CEO Jamie Dimon has been
credited for a confident and feisty performance today in front of Congress,
he was careful to not criticize their efforts thus far to regulate the
financial services industry. Given that JP Morgan has been on the receiving
end of federal bailouts, this should not be surprising. Last week I showed no
such reluctance when I testified in front of the Congressional House Subcommittee
on Insurance, Housing and Community Opportunity. The fact that my firm is
unlikely ever to receive a dime from government was undeniably liberating in
that regard.
I was invited to testify about the Federal Housing Administration's
(FHA) policy in the apartment lending market. Although this was a fairly
narrow issue, I told the congressmen the same thing I did last year when I
was invited by a different subcommittee to testify about job creation:
government programs don't solve problems, they just create new ones. While I
thank the Committee for inviting me, I believe the congressmen may have gotten
more than they bargained for. I can apologize for shaking up what would have otherwise been a
sleepy and forgettable proceeding, but I won't apologize for trying to inject
respect for the Constitution and free market capitalism into a venue that has
been doing its best to destroy both.
The subcommittee was considering whether to expand the activity of the
FHA to insure loans for multi-family (apartment) buildings. The mechanism to
achieve this was to extend FHA guarantees to pools of collateralized
mortgages backed by multi-family residential housing units. In other words,
Congress wanted to replicate the very dynamic that helped create the bubble
in single family housing, which ushered in the financial crisis of 2008, the
great recession, and left taxpayers on the hook after the bubble burst. As
one of the few people who warned about the dangers of federally subsidized
mortgages for single-family homes, I felt particularly qualified to warn
Congress about repeating its error. At the risk of sounding egotistical, as a
result of my unapologetic testimony the hearing turned into high drama.
Entertainment value aside, the resulting event starkly illustrated some of
the dense cobwebs that hang over the legislative process.
I have absolutely no objection to the idea that a healthy rental
housing market is needed. However, I believe that market forces are
sufficient by themselves to create it. The average American family now only
has $7,000 worth of savings, which would not be nearly enough to afford a 20%
down payment on the average American house. This means that most Americans
should be renters and not owners.
Normally, these simple facts would attract investment capital to build
affordable rental properties. However, these forces have been blunted by
Federal tax and housing policies that have exaggerated the economic benefits
of home ownership and have drawn excessive amounts of investment capital into
that sector. To correct the distortions, the Subcommittee was considering,
you guessed it, more distortive regulations. It never occurred to them to
simply scale back the original regulations that are the root of the problem.
Critics of the free market argue that investors will ignore the needs
of the poor. But Wal-Mart became stunningly successful by specifically
targeting low to moderate income consumers. This success came without
government guarantees or incentives.
Through a series of guarantees, loan assistance, and tax advantages,
ironically it is the government that is ignoring the needs of the poor by
encouraging them to buy over-priced homes. As a result they become trapped in
perpetual poverty, as all of their disposable income is consumed by mortgage
payments, property taxes, insurance, maintenance, etc. It's much better to
get out of poverty first, then buy a house when one
can actually afford it.
The panel of eight witnesses, of which I was a part, was composed
largely of representatives of the many interest groups who benefit from FHA
multi-family loans, including home builders, mortgage bankers, state housing
regulators, and tenants groups. I came to represent the interests of the
common U.S. taxpayer who will have to make good any liabilities incurred by
the Federal Government and who will have to live with the consequences of
distortive government policies (as we have been doing so conspicuously in
recent years). It was clear from my heated exchanges with the legislators
that they were not used to hearing from this particular constituency.
My other co-panelists had two missions: curry favor with the
congressmen and give them the ammunition they need to vote for a policy that
they likely want to support from the start. I wanted to let them know that,
despite the claims to the contrary, all loan guarantees expose taxpayers to
risk and that the housing market would be healthier if the government left it
alone. I brought to the table the frustrations of the American taxpayer who
has grown weary of government's urge to micromanage our economy and to fund
their experimentation with our dollars.
When taking heat from these surprised congressmen, I couldn't help but
think back to the reaction I received when I went down to the Occupy Wall
Street protest last year. Both venues were dominated by people who knew very
little about how capitalism actually works or how the United States rose to
economic dominance in the first place. One congressman stated his belief that a
functioning home market did not exist before the FHA came into existence in
the 1930's. While such ignorance
can be excused from scruffy protestors, we should expect more from our
elected officials. The following exchanges illustrate that point:
Republican Congressman Robert Hurt expressed some appreciation of my
economic positions, but even he seemed
unable to grasp that my solution was not more regulation. Congress is
addicted to the allure of doing "something." Trusting free people
to make rational choices is not considered "something." They are
addicted to the belief that if there is a problem, there must be a
legislative solution. I repeatedly told the congressman that the best thing
for government to do would be to "get out of the way," and that the
market could fashion a solution on its own. But his frustration in not hearing
specific legislative proposals meant that I might as well have been speaking
Swahili.
Even more troubling was the discussion I had with two democratic
congressmen. Emanuel Cleaver, II, failed to grasp how
government loan guarantees create unintended and often harmful consequences. Perhaps hoping to undercut my credibility by
eliciting my opposition to federally subsidized flood insurance (a program
that he likely believes to be beyond controversy), I explained how those
guarantees cost society money by eliminating barriers that would normally
prevent people from living in potentially dangerous flood zones. The
congressman gave no indication that he ever considered these arguments. Brad Sherman then tried to explain that since
Congress would always bail out homeowners who had been harmed by "front page disasters," any policy
that results in sharing the pain with private insurers should be considered
prudent. I guess the congressman has never, nor will ever, consider a policy
that involves short term political risk for the sake of long term economic
health. In the end, that lack of political courage is a far bigger problem.
Credit in the United States is a limited commodity. Money loaned for
one purpose is then unavailable for other purposes. Through its effort to
take the risks out of home lending, the FHA has directed more credit into the
real estate market than would have otherwise been the case. That means these
funds are not available for other enterprises which may have put the capital
to work in areas that may be more needed in the economy. I tried to convince
the congressmen that siphoning even more money into the housing market is not
the answer. They may not have listened, but I hope they got the sense that
the political winds are blowing hard on their front door.
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and
silver dealer selling reputable, well-known bullion coins and bars at
competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.
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