Just Thinking

I spoke to one of my sons today about government's financial games that often lead to unintended consequences. In particular, for those or you old enough to remember, the tax breaks for interest paid. Remember when any interest on loans was non-taxable probably as an incentive to get the economy moving? It didn't take long for people to run up all kind of debt so the politicians decided to focus just on getting people into homes so they removed the break on all interest and allowed it only on a home and a vacation home too (if I remember correctly). The idea was that if people were owners they would be better citizens, I guess, and it would raise tax revenues because all debt wouldn't be subsidized by tax breaks.

The unintended consequence was the invention of "home equity loans". People turned their home into a cash cow by transferring all debt in the belief that property values couldn't decrease causing the building boom and equity borrowing to skyrocket. The politicians saw some people being left behind so they made credit easy by requiring a percent of loans to be made in various high-risk areas which weakened the lending institutions triggering the lending crash (Another unintended consequence).

At the same time workers were needed to build all the homes so a deal was crafted that for humanitarian reasons (really economic) the border was allowed to become porous filling the needs of employers and the politicians. Unfortunately the unintended consequence was that American citizens lost jobs to those willing to work for much less. They had no intention of staying here but were mining America to send the money back home which drained off billions of dollars that American workers would have spent here. On top of one consequence was another, when the market crashed those workers either left with the money they had made or had children while they were here and those new citizens are now in our public schools being educated at taxpayer expense in many cases living with parents who are without formal education and are in the process of becoming citizens or living here illegally.

Now we have thousands of homes that no one can afford. The people who built them are gone and the ones who are here don't have the education to hold jobs that could support the payments.

Are we better off? Should government be in the "business" of economic manipulation? Check out the latest scheme here.