Henry Hazlitt, a name sadly unfimiliar to most, is a man whom I quite like, especially this one book of his. The book, Economics In One Lesson, starts out in parts. The first is a simple, common sense lesson on economic thinking, and the rest of the book is just the lesson being applied to things that many progressives and maybe some on the right now would support too. I’d like to go over a few things that I’ve learned so far, and I’m only on page 57.
In Chapter 6 of the book, titlled Credit Diverts Production, he teaches us about many things. One would be loans, and the differences between government loaning money and private institutes loaning money. When a private institution, say Bank of America, makes a loan, it’s with money that they have with them. When government makes a loan, say through Fannie Mae or Freddie Mac, it’s with the tax dollars the people gave them. Usually, private institutions are more careful in judging people and businesses before making a loan. There is more oversight and checking into backgrounds before an agreement is made. In government, there is less of that.
Hazlitt tells us that private institutions are more careful in lending, and will lend to customers they are either well sure will be able to pay back their loans, or are completely sure they can pay back. Why not lend to those who cannot? Because those who cannot pay back the money most likely won’t. Investors of capital want to be able to gain a return, and to see loans going out and not being repaid is bad news. They’d pull out of that failing venture, and thus, that institution would be doomed. That’s how things should work.
Hazlitt also tells us that government institutions are not that careful, and lend recklessly. Most times, they do not get back the full amount of the loan they lended out, and many times, they don’t make back anything. Hazlitt say’s this:
“If the government operate by the same strict standards, there would be no arguement for its entering the field at all.”
His notion is that when government makes loans, they make loans to B and forget A. A is the person or firm who’d be fully able to make payments and cover the duties on the loan. They’d be the one who a private institution looks positively at. B is the person or firm who’d not be able to make payments and fully cover the duties of the loan. They’re the person who the private firm wouldn’t probably lend to, and would need to to turn to government for said loan.
The reasons why government making loans is bad are as follows, and in this case, he’s using government-guarunteed mortgages:
“The advocates of government–guarunteed mortgages also forget that what is being lent is ultimately real capital which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government mortgages… invevitably mean more bad loans than otherwise. The force the general taxpayer to subsidize the bad risks and defray the losses. They encourage people to “buy” houses they cannot really afford. They tend eventually to bring about an ooversupply of houses as compared with other things. They temporarily overstimulate building, raising the cost of builiding for everybody…, and may mislead the building industry into an eventually costs overexpansion.”
Confused? Don’t be. We can apply this to today terms. Think back to the Housing Bubble. What was happening? Fannie, Freddie, and even private institutions made loans to people who wouldn’t be able to afford those homes. Prices on homes went up, and builidng began to pick up steam too. Then the bubble crashed, and people lost those homes they couldn’t afford. The whole country felt the effects of that malinvestment, so much that some private institutions eventually would end up bust.
So I thought I’d just type this up and share it with you. I heavily recommend that you actually do read this book. You can find it on Amazon, or if you wish to be cheap, you can dowload the PDF version put out by the Mises Institute. Either way, it’s a good ready, whether you’ve studied Microeconomics in High School, or haven’t learned a thing about economics at all.