"The reality of the risk to society"

By Nobel Prize-winner Vernon Smith on Creative Capitalism:

But here's the rub: the longer the loan, and the greater the uncertainty of a stable economic environment, the greater the required upfront equity, or down payment. Taken to the limit, these factors can result in no one giving you a loan. No one is to blame, and intervention by a government agency to reduce the risk to the mortgage lender does nothing to reduce the reality of the risk to society.

Home buyers, who are also voters, don't like to accept that reality. Neither do the politicians who want to get elected and convince themselves, just as the potential home owners convince themselves, that you can get something for nothing -- that you can obtain low down payment loans on home purchases and avoid the inherent risks.

These risks hold for all assets -- almost all new inventions, products and businesses are not loan-worthy -- but homes represent the universally popular asset. Hence the emergence of the uneconomical but politically popular (and now discredited) GSEs: Fannie May and Freddie Mac, both now going south, unless rescued by the deep pockets of the US Treasury. That rescue is no less the mark of a Republican than a Democratic action; their divide here is mostly a matter of rhetoric.