The hockey stick that wrecked the economy and the credibility of the nation’s major institutions
By Craig Cantoni | December 31, 2008
You’ve probably heard about the graph shaped like a hockey stick that purportedly showed a man-caused rise in global temperature. The graph was later debunked and is still the subject of a raging debate among scientists and pseudo scientists.
Contrary to that graph, there isn’t any debate about the hockey-stick graph that appeared in the New York Times Week in Review section on August 26, 2006. It’s an inflation-adjusted graph of home prices from 1891 to 2006.
The graph tells three stories: (1) how our loving, caring, munificent government screwed us once again; (2) how other major institutions, especially the media, were once again asleep at the switch; and (3) how the American people screwed themselves by trusting the government and the institutions.
By now, educated and informed Americans (all 132 of them) understand how the government fueled the housing bubble with easy money, with the tax deduction for mortgage interest, and with housing policies administered through the political patronage and money-laundering outfits of Fannie Mae and Freddie Mac, both of which were encouraged to loan to politically-favored, unqualified borrowers. At the same time, Big Fanny came up with the notion of securitizing mortgages, thus separating mortgage borrowers from mortgage lenders and blocking the personal knowledge that lenders used to have of the creditworthiness of borrowers.
To digress for a moment, the last insanity is similar to what our compassionate government did to undermine the healthcare industry. Government policies resulted in third-party payers coming between the providers of healthcare and the users of healthcare. Because someone else’s money is at stake, consumers of healthcare do not have an incentive to be wise purchasers of medical care or to save money for medical emergencies and the infirmities of old age.
Back to the graph of house prices: Home prices took off like a rocket in 1997, not only because of the aforementioned reasons, but also because of a change in tax law. That was the year in which a Republican Congress excluded the profit on a sale of a home from capital gains taxes under certain circumstances. Coupled with the widespread belief that home prices always go up (an absurd belief propagated by the government and other institutions), the change in tax law attracted capital to housing, just as the pathological need for power attracts scoundrels to politics (see Barney Frank and Christopher Dodd).
No doubt, home prices would not have risen as dramatically if capital gains taxes had not been cut for houses, or, better yet, had been cut across the board for all investments in all private industries instead of just for houses. Perhaps capital would have gone into plant, equipment, technology, infrastructure, and education instead of granite countertops. But noooooo, the economic geniuses in Congress couldn’t resist picking winners and losers, thus exhibiting the “Fatal Conceit” of all central planners, as written about so brilliantly by F.A. Hayek in his masterpiece of the same title.
Now Americans have elected a central planner par excellence in Barack Obama, and, despite the abysmal history of central planning, expect a positive result this time.
In the defense of Americans, the intelligentsias in the media, academia, and financial industry have done a great public disservice by not sounding a warning about the housing bubble when it first began to inflate. (The author of the above graph, Robert Shiller of Yale, is a notable exception.) Think about it: How often did you see a graph like the above in your daily newspaper during the housing bubble? How often did your stock broker, investment advisor, or 401(k) administrator warn you about the bubble and the predictable aftermath of its explosion?
Similarly, most newspapers didn’t warn Americans about the ridiculous price/earnings multiples during the dot-com bubble. But they did write about the glories of diversity, public transit, public schools, illegal immigration, green policies, and redistribution – as they continue to do today and scratch their heads in bewilderment over their plummeting circulation.
Incapable of learning what’s important and will sell newspapers, they have been largely silent about a Ponzi scheme that will trigger the next economic collapse. No, I’m not talking about the Ponzi scheme of Bernie Madoff. After all, the media have been blathering about him for weeks – after the crime was committed, of course. I’m talking about the $60 trillion Ponzi scheme of Social Security and Medicare.
If newspapers were credible institutions, they would have been warning the public for years about this scheme, by frequently publishing graphs of the deficits and unfunded liabilities of both programs on their Sunday front pages. But they are no longer credible institutions, just as Congress, the White House, academia, and the financial industry are no longer credible institutions.
I’d like to whack all of them with a hockey stick.