Two market failures

If you are a renter, home buyer or potential seller, or merely an investor—be sure to read this Sunday’s New York Times front page story about the unraveling of the mortgage bubble. The New York Times points out that despite soothing reassurances from those who formed the bubble, the major shake-up in the housing market is yet to come. In the past, in such situations, the free market advocates -- rushed to the government to bail them out. This is what happened during the Savings and Loan debacle, to framers who are still heavily subsidized, and to Chrysler among others. Most recently various airlines tried to stick the public with their under-funded pension plans. If the banks and builders succeed, taxpayers will cover the losses caused by wild speculation in the real estate market.

The Sunday Washington Post front page features a report about a fight between free market ideologues at the Department of Commerce and the military and State Department realists in Baghdad. Ever since the U.S. occupation of Iraq in 2003, the occupation authority has maintained the monthly handout every Iraqi had been getting under the Saddam Hussein regime. These handouts include a staple supplies such as wheat, sugar, salt, and soap and detergent. They cost the public about $4 billion a year. Commerce ideologues, most of whom have never been to Iraq, hold that only the poor should get such handouts, and even they should best be given cash instead. Many economists would agree with them. However those familiar with Iraq hold that the result would be major social unrest—about the last thing the country needs. Just another example where the free market theory falls down.

Update: Rarely have my predictions come true so quickly (those that come true). Senator Christopher Dodd (D-CT) just announced that he would seek billions of taxpayers’ dollars to bail out irresponsible borrowers and reckless lenders.

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