LAISSEZ-FAIRE AND THE HOUSING SECTOR
JK
LAISSEZ-FAIRE AND THE HOUSING SECTOR
Broadly defined, Laissez-faire, comes from the French literally, “let alone”. The economic translation of this novel concept flows well with the rugged personal responsibility and freedom arguments associated with right wing movements such as libertarianism, and have been frequently described in literature by notable economists like Milton Friedman in Free to Choose, but only can make sense in a market environment influenced by pure competition.
By that I mean a market where a large group of suppliers provide similar goods to a vast marketplace, where the choice of consumers setting the price, is the driving force behind market equilibrium. A good example of such a market lies in commodities, like wheat production, where many farmers produce a relatively homogenous product, that is purchased to satisfy demand. Even in this case, value added manufacturers buy the raw material to produce products like breakfast cereal, granola bars, or bread that satisfy demand for finished goods allowing consumers time for other things beyond milling and kitchen preparation.
Back in the day, at the founding of our nation, this simplistic view of a free marketplace was much easier than it is today. You ask how this is relevant to the housing bubble that devastated our economy at the end of the Gee Dub administration? Here is a limited explanation, (time and space are scarce).
The description of our modern financial market violates almost every constraint provided by the less evolved definition of a free market. Where a few very large firms (some say, me included, that are Too Big to fail!) engage in a form of market known as monopolistic competition, where they, not the consumer, set the market price of real estate, as well as the terms under which it is purchased.
Monopolistic Competition or Oligopoly is the name coined for this kind of market. And it cannot be relied upon to act in the consumers best interest. Such markets must be regulated by government, as they were in the age of the Tycoon, (Standard Oil, AT&T, and US Steel come to mind.) Antitrust laws are valid. They force a monopoly or cartel to act in a more reasonable fashion, and protect the consumer by creating competitive markets or setting ceilings on the prices and terms of contracts offered by such behemoths.
For sure the domination of Big Money in politics has had an influence. During the Reagan and subsequent Bush administrations, much of the regulatory authority of government was systematically gutted, and otherwise ignored by the few remaining firms that control $60 plus Trillion, with a ‘T’ in real estate mortgages in America.
Novel mortgage products like ARMs, nothing down, and interest only mortgages without regulation, as well as special markets for bundles of securities based on real estate like ‘Collateralized Debt Obligation’ derivatives along with the systematic corruption of credit rating agencies ability to function led directly to the breaking of the financial bubble.
Regulation and oversight are making a come-back to the financial market, despite the heel-dragging of the GOP. Dodd-Frank was enacted into law, the SEC and other Consumer Protection Agencies now have the desperately needed ability to contain the greed and corruption of firms too large to fail, and we have given back a sense of rational behavior in the market for the consumer.
It will take time to fully recover from this disaster, and many more lessons will be learned, but for a change, enlightened oversight of unruly business practices will be the new norm.
JK