They Must Be Insane

One definition of insanity is repeating a behavior or practice that has always been unsuccessful in the past with the delusional idea that it will somehow succeed in the future, in spite of all the evidence to the contrary. Such insanity is frequently manifested in government policies that somehow get imposed on us over and over even though they always fail to accomplish what they are intended to accomplish, and frequently result in adverse effect not foreseen at the time they were imposed. A good example of this is price controls. Yes, we all know that these have failed in the past when they were tried by dictators, despots, left-wingers and other assorted politicians down through the ages. If you put an artificial ceiling price on any commodity, the ceiling will immediately become the floor, and pressure will inexorably mount to raise it. And until it is raised, not only will there be a shortage of whatever commodity is thus regulated, there will be corruption, black markets, etc. created. It happened with gasoline in the 70s, with price controlled rental units in large cities for decades, and with countless other items over the centuries. It is really a singularly bad idea. Yet “progressive” politicians resort to it over and over again to placate the ignorant bleating of their benighted constituents who clamor for “fair prices.” Adam Smith, in The Wealth of Nations, clearly spelled out the inevitable failure of price controls and the virtue of free markets way back in 1776,(oh the irony), but he is mostly ignored and dismissed by today’s left-wing professors of economics, who, none-the-less, have failed to come up with a better system. Russia’s colossal failure in their seventy year experiment in “government control” over prices and production should serve as a warning beacon to all but the most thick-headed.

So, in spite of the abundant evidence that it won’t work, surprise, surprise, here comes the Obama administration with price controls. Yes price controls in the form of interest rates banks are allowed to charge on loans. As of October 1, 2009, banks are restricted in the rate they can charge on mortgage loan products. Of course the new rules are supposed to "protect consumers from problem mortgages,” (which, by the way, were caused in large part by the government requirements imposed on banks by Jimmy Carter’s Community Reinvestment Act.), but in reality they will decrease the amount of loans available to borrowers. The new policy limits the rate banks can charge. Therefore, banks will simply stop making loans to all but the most qualified of borrowers, since the government controlled rates will not allow them to recoup their costs on the riskier mortgages. Additionally most banks have already raised their rates to the highest rate the government will allow since that is the “government approved rate” so they no longer have to compete with one another. No more competition, decrease in products offered, higher prices. Inevitably the pressure will mount for the government to increase the “ceiling” rates. Higher rates for everybody will result due to the lack of competition. Without a doubt banks will make fewer loans to fewer borrowers and the very people who jammed these rate controls through will be crying “discrimination” when the banks elect not to make risky loans. Without being able to price these loans to be viable, they will simply stop making them. This has already happened. We’re not talking the “loan shark” rates that some financial institutions were charging. We’re not talking 36% mortgages here. The banks were making these riskier loans at 2% or 3% over the rate available to the best borrowers. But no more. These loans will no longer be available due to the price controls imposed. Classic consequences: Less supply, less of the market served, more demand equals inflation, corruption and higher prices for everybody. It is insanity.