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  • Housing Bailout Case Study in Rent Seeking

    Recently, a scandal has broken out that provides great insight into the housing crisis. Countrywide Mortgage brokers have been treating Congress to VIP lending rates. Accepting donations of $100 or more is illegal for these politicians, but scandals like this are not uncommon. The deeper question is why a profit-seeking business like Countrywide would want to offer discount rates to government officials in the first place. It is, of course, because they expect something in return.

    If government could not offer these businesses any preferential legislation, exemptions from taxes or relief from anti-business regulations, there would be no incentive to buy them off.

    Economists call this kind of activity rent-seeking. When firms spend money – or decrease their profit – in order to ensure favorable treatment by government it is not efficient. They produce no more output, and instead the resources are wasted. The favorable treatment gives them a monopoly position or an advantage over their competitors and the consumer suffers.

    It also encourages government officials to pass more kinds of regulations that strangle business so that there are more chances to offer relief in exchange for pay-offs from the businesses. So, it creates a feedback loop leading to more regulations, more bribes and then even more regulation.

    The only way to end the cycle is to limit the scope of government with a clear line preventing government from offering any kind of preferential treatment to firms.
    But rather than moving toward a smaller scope of government, we are currently headed in the opposite direction. The new housing bill is set to bail out firms on a preferential basis – often by helping those, like Countrywide, who made the most risky sub-prime loans. In the future, these businesses will remember the compassion of Congress and will take these risks again.

    Local governments will benefit too – with $3.9 billion in community development block grants. These grants are provided so that local governments can purchase, renovate and resell foreclosed homes. The proceeds can then be used to do this again next time that government subsidies followed by government bailouts lead to a new round of foreclosures. In this way, government can cause a crisis, solve it, and cause a new one, little by little expanding its scope in the process.

    Have we not learned the lessons of the National Recovery Administration, when subsidies and bailouts, public works programs, and stringent regulations led us to a consolidation of government and big business that strangled private initiative and threatened the liberties we hold dear? Apparently we have not – a recent Time Magazine poll showed that 82% favor public works projects and 70% say more government programs are needed for those struggling.

    The more that we allow government to solve our economic woes, the more that it expands its scope and creates new woes, just to have something more to solve. This is the rent-seeking power of government at its most frightening.

    Posted in Ongoing Priorities [slideshow_deploy]

    One Response to Housing Bailout Case Study in Rent Seeking

    1. max, los angeles says:

      Lately, I've begun to regret the work and moral ethics I was raised with. I give a good days work for a good days pay and am honest in my dealings with people. It has proved to work well as I make a very good living in a very difficult, industry(FILM). I make a lot of money due only to the extreme amount of hours I work, but still not bad for a high school drop-out. Even with the good income, I've spent the last 5 years in Los Angeles scratching my head wondering how all these people are affording all these house's. I make over six figures but still could not afford to live in my home town. I may be a high school drop-out, but i can do simple math. Now it appears that no one else could afford these prices either. I think it was Frank Zappa who said the worlds greatest natural resource is stupidity. I'm sorry that a large number of people bit off more than they could chew, but not sorry enough to pick up the tab.

      How is it possible that someone who lives with-in their means is getting penalized fot this mess. I also believe that its my lenders responsibility to make sure I can afford their loan before they give it to me. Now I see that my elected government is going to force feed me another bailout. Even though I could'nt afford a home, I now have to help all the other people who could'nt either, but they bought one anyway. I also get to pitch in and prop up the lenders that created this mess out of simple greed so their stockholders don't feel to much pain. Is it just me or is anybody else as angry as they've ever been. Due to my lack of formal education and unrelenting hours at work, can someone who knows just tell me if and when the constitution allows us to start shooting people for the common good. I have no time to research and I'm finding it hard to believe that this is what our founding fathers had in mind for me. I'm looking for real justice, you know, like in the movies. I would hate to have to fall back on stupidity and greed in order

      to succeed in life.

      P.S. This is the 1st time I've written a comment on the internet. I've always been a live and let live guy , but c'mon.

      enough is enough.

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