Posted by
Andrews on Tuesday, March 04, 2008 7:05:34 PM
I was thinking again about the events which the media insists on calling the housing "crisis", and it occurred to me that often the media generates a crisis situation by the simple expedient of looking at only one side of things. Sometimes, if we adopt a more balanced perspective we will see that a "bad" event is really much more beneficial.
Take, for example, the drop in real estate prices. To the media this has been a horrible thing, robbing homeowners of their equity, harming those trapped in ARMs, forcing banks to close home equity lines. On the other hand, let us look at it from the perspective of someone who has not yet bought a home. In my area, it appears prices rose 60% to 80% in the past 8 years, while wages rose nowhere near that much. The fact that prices have now dropped around 10% from their peak last year likely means that a new home is now within reach of more buyers. So, while it is a bad thing for the sellers, the drop in prices is a benefit for the prospective buyer. (Of course, for those selling one home to buy another, it may be a wash, unless the two housing markets differ greatly.)
Let us take another facet of the so-called crisis, the tightening of loans. To the media, again, this is just an unmitigated disaster. Those who could get loans previously now cannot, or they have to pay much higher rates, or maintain greater equity in the home. Of course, that is only one side of the story. If we look at the money not as loans, but as money invested by various shareholders, bank account holders, and others, we draw different conclusions. Previously, those banks were lending to risky borrowers at a rate too low to compensate for the risk. In essence they were risking the investors' money while not paying them adequately. Now, making less risky loans, they are once again properly balancing risk and return. So, while it may be bad for borrowers, for the bank account holder, or someone with a bank stock in their 401K, this is a positive development.
It is not just in the housing "crisis" that this one-sided reporting occurs. Let us look at just one other example.
We often hear about how bankruptcy laws have been "tightened to "favor lenders". Not only is that a very one sided view, but it is quite mistaken. We will leave aside the fact, as with the loans mentioned above, that the money loaned out most often belongs, not to the company, but to private investors, which means liberal bankruptcy laws hurt 401Ks and pensions more than "rich industrialists". Even ignoring that, it is impossible to say tight bankruptcy laws favor "companies" but hurt borrowers.
Think about it this way. You have money to lend. If you have the ability to compel repayment, and can make a fair return, you will likely lend all or most of it at a fair rate to good risks. On the other hand, if you may be forced to forgive some or all of the debt, you will more likely simply keep your money, rather than lend it, or lend it only to the best possible risks. Nor are you likely to be quite as generous with your funds. If you are able to recover every dime, you may charge a relatively low rate of interest, but should you be required to accept losing some of the money you lend, you will clearly only continue lending if the return, that is the interest you can charge, is substantially higher.
By making it impossible to collect, liberal bankruptcy laws make it harder for borrowers, especially those with less than perfect credit, or with no credit record, to find lenders. (By limiting the profit on loans, caps on interest rates do the same thing.) Rather than "favoring lenders" liberal bankruptcy laws actually hurt borrowers, who find it harder to obtain credit, and more expensive to get a loan when they do find a lender. By taking only the side of the specific, defaulting borrower, we ignore the harm done to the remaining borrowers and potential borrowers.
I could go on and on with these examples, but I think I have said enough. A few examples should suffice to show the general principle: Whenever someone explains how a particular policy hurts or helps someone, or decries this or that crisis, look away from the person at whom they point, look at the bystanders, and see if there may be some others who see the issue quite differently.