Crisis Prediction

Conventional opinion is that the housing crisis cum financial crisis could not have been predicted. I beg to differ:

Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably mean more bad loans than otherwise. They force the general taxpayer to subsidize the bad risks and to defray the losses. They encourage people to “buy” houses that they cannot really afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raise the cost of building for everybody (including the buyers of the homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in they long run they do not increase overall national production but encourage malinvestment.

~From Chapter VI “Credit Diverts Production” in Henry Hazlitt’s “Economics in One Lesson,” first published in 1946

I’m sure, that in 1946, Hazlitt could never imagine the extensive government involvement in housing that materialized over the next 60 years … and the vast degree of malinvestment that followed in its wake.

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