The hockey stick that wrecked the economy and the
credibility of the nation’s major institutions
By Craig J. Cantoni
Dec. 26, 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 below. It’s an
inflation-adjusted graph of home prices from 1891 to 2006 (sorry for the
blurriness). I’ll pick up the commentary
after you’ve glanced at the graph and strained your eyes.
The above 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
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.
An author and columnist, Mr. Cantoni can be reached at