By DAVID MOON, Moon Capital Management, LLC
In suggesting that a housing and
mortgage market built on free-market principles was 'a false idol after all,' a
recent New York Times article examined what it called the dominant idea guiding
U.S. economic policy for a
quarter-century: that the free market is unfailingly wise.
Is the bursting of the housing bubble
also a bursting of the free-market phenomenon?
Any capitalist understands that risks
should be priced into security prices; mortgage loans are assets, similar in
many ways to other types of bonds. But unlike most homeowners, IBM doesn't
usually have an emotional attachment to the assets used to collateralize its
debt. And houses aren't homogeneous or evenly divisible assets like stocks.
Wall Street did its best to
accommodate the special characteristics of houses by creating bonds that were
backed by packages of house loans.
It was the free market at
A free market is not unfailingly
wise. Despite the suggestion of the New York Times, no learned analyst would
suggest so. Only an opponent of free markets would use that phrase, and then
only in an attempt to set up a straw man that could easily be
Free markets aren't unfailingly wise,
but like Churchill's observation of democracy, free markets are wiser than any
other economic arrangements.
Despite their wild vacillations from
overpessimism to irrational exuberance, free markets provide better access to
capital than any centrally planned economy. With access to capital ' that is,
opportunity ' comes responsibility and the possibility of various outcomes. A
controlled market that requires little or no responsibility from buyers and
sellers is usually accompanied by a lack of variability in outcomes. No
failures, but no real success, either.
Free markets provided billions of
dollars of capital to lenders that originated mortgages they would have
otherwise never been able to grant. Hundreds of thousands of families own homes
who would have been unable to get financing if a free market hadn't allowed the
securitization and packaging of mortgage loans.
Yes, many of those loans are in
default. People are losing their houses and becoming renters.
But how many of them would have
remained renters under a 1970s-style mortgage system in which a local bank made
a mortgage loan, held it on its books for 30 years, then made another loan? This
free market, complete with greedy mortgage brokers and stupid products like
negative-amortizing adjustable-rate option ARMs, provided increased ownership
opportunities for hundreds of thousands of Americans.
From 1960 to 1994, home ownership
rates remained relatively constant, around 63 or 64 percent of all households.
That began to change about the time of the popularization of the mortgage-backed
From 1994 to 2005, overall home ownership in the U.S.
increased 7.66 percent. The gains were most notable, however, among minorities
(24.1 percent) and low-income individuals. While many variables help explain
this, one of the major contributing factors ' especially among middle- and
lower-income groups ' is greater access to various forms of
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).