Be cautious about market-based solutions

Many Americans think the private sector, mostly unfettered, can solve many of the problems facing our country today.

The more thoughtful of these people also realize the government is often the only source of sufficient capital. More importantly, the government is sometimes the only one with the will to use it for the general good. Based on these two premises, it seems hard to see why market-based solutions are often seen as a panacea to many people.

Bidding for contracts for construction and the like are established parts of our economic practices.

The problem arises when the interaction between private businesses and government goes beyond partnerships and veers into collusion. Lasting harm to the economic fabric of the United States and the world can occur.

One area in which that collusion can be found is the housing market.

Raghuram Rajan writes on this topic in his 2010 book “Fault Lines.”

Though I do not agree with many of Rajan’s policy goals, I think his historical insight into this area is stellar. In a chapter bombastically titled “Let Them Eat Credit,” Rajan explores sources of the collapse of the housing market that helped kick off the so-called Great Recession. He talks about President George W. Bush’s “ownership society.”

In “ownership society,” Americans, especially those with lower incomes, were encouraged to own homes, even if it was fiscally unwise. It was presumed that having an ownership stake in society, rather than renting, would make these people more productive in the capitalistic system, and help them “rise” in the way the poor and lower classes are advised to in American culture.

But Bush was not the only one to push home ownership.

President Bill Clinton and many Democrats also pushed for more home ownership in low-income families as a means of economic betterment.

To this end, many in the American government pushed Fannie Mae and Freddie Mac, formerly government-sponsored enterprises, to make credit more available to low-income people. These two institutions, along with other lenders, distorted the reality of home ownership and took advantage of low-income prospective homeowners. These risky loans were then pooled together with safer loans and sold as mortgage-backed securities.

Though MBSs are legitimate sources of income for banks, their injudicious use infamously played a large part in our recent financial crisis. In short, the government’s decision to collude with the private sector and try to “help” low-income people using easy credit backfired.

Undoubtedly, we as a society need to help those in poverty find homes.

Easy credit and pressure to own a home are not good ways to achieve this goal, though. Direct government help could be a better option.

Public housing is now infamous after high crime rates and de facto racial segregation doomed mid-century attempts. It is not, however, intrinsically a bad option. Public housing needs to be implemented in a way that is more careful and integrated into communities. Section 8 housing is a better market-based solution than easy credit, though it has problems, as well.

At any rate, the subsequent damage from easy credit is reason enough to be wary of market-based solutions to societal problems.

­— estahr@indiana.edu