The government seems to be doing everything it can to re-inflate the housing bubble. Artificially low interest rates, loan modification programs, first time home buyers credit are just a few of the initiatives aimed at attracting more demand. These programs have no doubt worked, as home prices are showing signs of stability.
On the surface, everything sounds great. Home owners are staying in their houses, investors are enjoying the recent rise in stock prices, and Americans are enjoying a higher confidence in our economy. But at cost? What is the message we are sending to society?
During the last decade, many people made the bad financial choice of buying a home they cannot afford. Then as home prices continue to rise, they compounded the problem by extracting more equity out of the house. “Real estate prices never go down” they keep hearing, while they use the borrowed money to fuel their spending.
The last couple years was a true awakening, as severely leveraged home owners were forced out of their homes. For the first time, people were starting to realize that home prices doesn’t go up forever, and that buying an overpriced home might not be a wise choice. It might not sound too understanding, but the message is a good one. It’s a lesson we need to learn.
Then the economy got worst. Banks started complaining about their losses, home owners started crying about their house prices and everyone else yelled at the stock market. The government had to do something. It gave the banks money to survive, injected a ton of capital into the credit markets and dreamed up a bunch of programs to help the irresponsible home buyer. Sure, the financial system might be saved, but the good lesson is now reversed. Instead of knowing that risks are involved with every decision, we now understand that “if we make a small mistake and suffer, but if the mistake is big enough, we will be rewarded”.
A reader sent me the following piece, which sums it up perfectly:
An economics professor at a local college made a statement that he had never failed a single student before but had once failed an entire class.
That class had insisted that Obama’s socialism worked and that no one would be poor and no one would be rich, a great equalizer.
The professor then said, “OK, we will have an experiment in this class on Obama’s plan”. All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A.
After the first test, the grades were averaged and everyone got a B.
The students who studied hard were upset and the students who studied little were happy.
As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.
The second test average was a D! No one was happy.
When the 3rd test rolled around, the average was an F.
The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.
All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when government takes all the reward away, no one will try or want to succeed.
Could not be any simpler than that.
- If we keep bailing companies out, all the good entrepreneurs will move out of the country.
- If we keep saving irresponsible home buyers, more people will make irrational financial decisions.
- If we keep minimizing the gap between good and bad decisions, we all fail.
This is part of the Government Improve Series, where we discuss government related money issues every Friday. Find out the other articles at the link above.
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{ 18 comments… read them below or add one }
It does seem that everything the government does lately has been meant to save people and companies from their own mistakes.
You don’t run your company with sound business practices? Don’t worry, the government will bail you out.
You buy more house than you can afford? Don’t worry, the government will come to your rescue.
You want free health care? Sounds good, we’ll tax everyone else to pay for it.
There seems to be less and less incentive to excel in this country, and everyone wants a free ride.
*sigh.
Exactly. I heard that they might suspend the cash for clunkers program too after only a week. How would you feel if you are Toyota and you spend all this money creating and airing those new commercials to help promote the program just so they can close it down the same week. So stupid.
I don’t think the US is becoming Socialist. If you’ve spent any time in a country that was communist or socialist I think you’d have a hard time making comparisons that we were or were becoming so. I hope Obama leads us out of this mess and I pray that he makes sound decisions. And, if you don’t like things as they are I suppose your only insurance against is it to pick up and move.
Jerry
I was born in Hong Kong and I moved to Canada when I was young. My parents were born in China when communism was at its most extreme. Most of my family members live in China, Canada and Hong Kong so I’ve seen my fair share of communism or socialism.
What our country is doing is nothing different than what the Chinese or the Canadian government would do. Sure we are supposed to have debates but they still end up passing what they want passed. Only over here, they add more insane bills into the original one and they delay the whole thing while the news station puts their own spin on the situation.
If this keeps up I don’t think I’m the only one that decides to move.
Jerry,
That is a great idea pick up and move, but unfortunately you are right an everywhere else is worse. So when you say that the US is not becoming socialist because it does not compare to communist or socialist societies you have visited that is a good thing. The American people who are fighting a push toward socialism can see the writing on the wall. Socialism does not happen over night and this has been occuring slowly over a long period of time. Everytime a so called “socially concious” law is passed we take a step toward socialism. Keeping your head in the sand does not mean you will avoid the truck aimed at you.
Just think within your personal group of friends and pick out the free loader. Every group has one and some have more. Think about how much it annoys you. Now work out the percentage of just your group and figure that into the 300 million Americans in this country. This country will fail if Americans do not start taking personal responibility for themselves.
Steve,
I agree with you completely. I think a lot of people are looking for a fall guy and blaming Obama because things have come to a head (or an abyss). The bail outs started before he was even elected! Dealing with these issues require looking at the root of the issues
Jerry, I don’t believe our only option is to pick up and move. I believe dialog, debate, being politically active, etc. are ways to make changes. For instance, OBama, pushed and pushed to have the health care reform done before recess. But grassroots efforts caused their representatives to pause and think about what they were passing. As a result, health care reform is being given a well needed breather and many necessary closer looks at the legislation.
And we may be far from being truly socialistic, but we are certainly moving closer. Gov’t should not be in the bail-out business. No company should ever be too big to fail. Gov’t should not own any part of a private company, yet our does own pieces of quite a few at the moment.
Our biggest insurance is the fact that we get to vote every 4-years. If he doesn’t lead us out, we’ll lead him out. :O)
The problem with a 4-year vote is that it’s people are only thinking about recent events. Also, a good section of the population is manipulated by the support groups who get kick backs from the political system. I wouldn’t go as far as to say that it’s a scam but our system does give a hint of that.
I think the moral of that anecdote is that socialism will fail because it works against human nature. But if we are celebrating the aspects of human nature that make capitalism so successful, such as incentive to succeed, we need to also acknowledge the downsides. People may only excel when given an incentive, but there is also greed, ignorance, fear, and irrationality. Hence the situation we’re in now. I agree people need to fail to see the error in their ways, but sometimes the situation is bigger than those specific people. Are we willing to let them learn their lesson at perhaps the cost of the global economy? Besides, at this point, the bailout malaise is in full swing. We should focus our attentions on preventing another financial market failure in the future.
David, well said.
An engineering student I know wants to work for the government instead of a business, because she won’t have to work very hard. And working for a company would be too much work. She said this very emphatically.
I think most people have a hard time wrapping their head around the intricate and sometimes confusing concepts surrounding socialism and capitalism and we end up making blanket statements in either direction and don’t really know how to refute the counter-arguments.
But experiments like those of the professor are great illustrations of what happens when incentives change. The incentive of individual excellence is replaced with the desire to free-load.
I don’t often talk about politics, but the latest series of bailouts has me thinking. What I do believe in is personal responsibility.
But if the automakers fail, think of the trickle-down effect, my coworkers say. Parts suppliers, local economies, and many other industries will fail…
Okay, fine. But money is money – if it’s spent through the government, it has to be taken through taxes. And that results in lower spending, which fails local economies anyway.
I may not be an economist and I certainly don’t understand everything, but I think timeless principles need to be respected or a very hard, concrete wall will eventually be hit…
I don’t have time to read this. I’m going to get my fully paid-for car crushed into a cube so I can buy a brand new one on credit through the cash for clunkers program. The recession is over, man!
Someone seems to have enjoyed my comment so much that they scraped it. Oh well.
You forget how the other “socialist” countries such as in Europe are doing better than we are and didn’t have as much of a crisis as we did in North America. Socialism is not so cut and dry anyway. It’s just a label and has the business side as well as the social side. What we have had here in the US is what I call “hypercapitalism”. Everything revolves around making money and it has affected how we care for our people (and our selves). We are too wealthy a nation to let our children starve and not get doctor’s check-ups. It’s a shame. The long term effects are that our nation becomes less competitive economically in this global environment. If we let what’s left of our manufacturing and technology base shrivel up and die, then our economy suffers too. We need to export manufactured goods to bring money into our economy. You can’t export haircuts and carwashes.
People forget that when we don’t take care of our people, we end up spending more on healthcare, crime prevention and other areas. If we let our industries fail and people lose jobs, the tax revenues dry up and the government ends up spending more later. It’s not fair that people who made bad decisions get bailed out, but if they are not helped, we all get hurt more. The prime example is foreclosures and abandoned houses reducing the value of my house which is paid for on time.
Obama is doing what needs to be done because things went way too far the other way for far too long.
Quite simply– the more things change, the more they stay the same.
“You forget how the other “socialist” countries such as in Europe are doing better than we are and didn’t have as much of a crisis as we did in North America.”
You forget how it was the “socialist” policies in our country, like Clinton’s housing practices, the Federal Reserve’s rate cuts, and George W. Bush’s deficit spending that brought about this crash.
People keep blaming Clinton for the housing crisis, but it’s only partially his administration’s fault. Read the part under “The Real Deal” at this link…
http://www.factcheck.org/elections-2008/who_caused_the_economic_crisis.html
I would say deficit spending got us into this mess but that’s not necessarily tied to socialism. War spending and tax cuts contributed for sure and purely capitalist governments can do those things as well. Rate cuts aren’t tied to socialism at all either. In fact, that’s pure capitalism.
Thanks for the link. I missed that info in the middle of all the campaign mud-slinging last Fall. Seems like everyone was playing fast and free with the “facts”.