The subprime loan market provides an interesting example of a manufactured crisis. Partly the fault of government interference before the fact, and partly the result of press hype afterward, the "crisis" is really nothing of the kind. Unless, of course, one is willing to call any market fluctuation a "crisis", which, during a Republican administration, the press appears to be willing to do.

The fact of the matter is that subprime "crisis" is so only in comparison tot he exceptionally lenient lending environment we had for the past few years. I realized this when I heard people commenting on how borrowers would no longer be able to take loans over 90% of value, and B credit borrowers could no longer get 6%. It reminded me of working in a mortgage refinance company in the late 1980's. At that time, A credit got about 7.5% and only the best of A credit could borrow against 90% of equity. In the late 80's it was far more common to get 8 to 9 % loans, and most were on 80% of equity at best. Had I been able to offer these "crisis" rates, I would have become a rich man.

And that is the situation with most of the crises the media is pushing recently, they are crises only in terms of being the end of an exceptionally good economic period. Of course the press can't admit that,a s they would have to say that the first years of the Bush administration were good times, and that goes against the consistent media claims of the past several years, but it is still true. The rates today are bad in terms of the past 5 years, but incredibly low when compared to the the 1980's or 1970's. The housing "crisis" represents quite a drop from 2005, but houses are still worth twice or more what they were in 2000. And our unemployment has been slowly rising, but the rate is still comparable tot he lowest of the Clinton administration.  In short, we got used to exceptionally good conditions and so we are calling a return to merely good times a "crisis".

"But", some will say,"the loan market did collapse, there have been foreclosures, isn't that a problem?" And I have to agree that the market did undergo a change, but, in reality, the current situation is a good thing. The supposedly "good" situation which preceded the crash was the problem, not the adjustment we are experiencing now.

Before the crash, the government was doing what it could to push the mortgage industry to put money into risky loans. Not only by keeping interest rates artificially low, but through programs to encourage lending to various high risk groups, the government was trying to push mortgage funds into risky investments. And the lenders, being subject to government regulators, could not resist such pressures, and sank money into these bad loans.

The collapse was inevitable.

But let us not confuse a crash, or a correction, with a crisis. Whenever there are mistaken allocations, the market will inevitably adjust. And those who were involved in high risk activities will lose money. I suppose for those people it is a crisis, but to call it an overall crisis is absurd. It is simply the market recovering from a misallocation. If anything we should encourage more such adjustment. As I wrote before, far form being harmful to borrowers, such adjustments actually favor borrowers. While money is tied up in bad debts, which are then forgiven through liberal bankruptcy laws, it is harder for future borrowers to find financing. So these adjustments actually make it easier for those who can qualify to find money to borrow.

Of course, none of that will deter the press from calling for government intervention. Despite the fact that the situation itself is nowhere near as bad as the press depicts, and despite the fact that government intervention gave us what problems we do have, the press will likely still call for yet more intervention, and the people, subject to a constant media drumbeat of crisis, will eventually come to believe that there must be a crisis.

And that is the one crisis which worries me, the crisis of government meddling in the economy. We have already had government help in all of these areas, and that help has brought us to where we are. We have had all the help we can stand, no matter what the press may claim.

There is some hope. When John McCain, hardly a champion of free enterprise, is arguing for a market solution, there must be a relatively strong opposition to intervention in the Republican party. So perhaps the worst will not come to pass.

NOTE

This is a bit of an ill-starred post. Twice I completed a post on the mortgage crisis and twice my browser crashed right before posting. Hopefully this one will make it onto the blog. It remains to be seen whether it will prove to have been worth the effort.

I leave that decision to my readers.