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Jewish World Review
March 10, 2008
/ 3 Adar II 5768
How government makes things worse
What do ethanol and the subprime mortgage meltdown have in common? On the
surface, nothing at all. But dig down a little, and each is a good reminder of
that most powerful of unwritten decrees, the Law of Unintended Consequences
and of the all-too-frequent tendency of solutions imposed by the state to
exacerbate the harms they were meant to solve.
Take ethanol, the much-hyped biofuel made (primarily) from corn. Ethanol has
been touted as a weapon in the fashionable crusade against climate change,
because when mixed with gasoline, it modestly reduces emissions of carbon
dioxide. Reasoning that if a little ethanol is good, a lot must be better,
Congress and the Bush administration recently mandated a sextupling of ethanol
production, from the 6 billion gallons produced last year to 36 billion by
But now comes word that expanding ethanol use is likely to mean not less CO2 in
the atmosphere, but more. A lot more: Instead of reducing greenhouse gas
emissions from gasoline by 20 percent the estimate Congress relied on in
requiring the huge increase in production ethanol use will cause such
emissions to nearly double over the next 30 years.
The problem, laid out in two new studies in the journal Science, is that it
takes a lot of land to grow biofuel feedstocks such as corn, and as forests or
grasslands are cleared for crops, large amounts of CO2 are released. Diverting
land in this fashion also eliminates "carbon sinks," which absorb atmospheric
CO2. Bottom line: The government's ethanol mandate will generate a "carbon
debt" that will take decades, maybe centuries, to pay off.
Actually, that's not quite the bottom line. Jacking up ethanol production
causes other problems, too. Deforestation. Loss of biodiversity. Depletion of
aquifers. Deadlier fires (ethanol fires are harder to extinguish than those
fueled by gasoline). More ethanol even means more hunger: As more of the US
corn crop goes for ethanol, the price of corn has been soaring, a calamity for
Third World countries in which corn is a major dietary staple.
Senator Charles Grassley of Iowa bloviates that everything about ethanol is
"good, good, good," but it plainly isn't, isn't, isn't. Which is why the fate
of ethanol, including how much of it is produced, should be determined by the
decentralized process of free exchange the voluntary interactions of
countless consumers and producers, buyers and sellers, each acting according to
his best judgment and in his own best interest. Instead, Congress and the
president, convinced as always that they know best, imposed a single,
inflexible, ham-fisted directive from above. The result is that the carbon
dioxide they aimed to reduce will be increased, and many people will suffer
The subprime mortgage collapse is another tale of unintended consequences.
The crisis has its roots in the Community Reinvestment Act of 1977, a
Carter-era law that purported to prevent "redlining" denying mortgages to
black borrowers by pressuring banks to make home loans in "low- and
moderate-income neighborhoods." Under the act, banks were to be graded on their
attentiveness to the "credit needs" of "predominantly minority neighborhoods."
The higher a bank's rating, the more likely that government regulators would
say yes when the bank sought to open a new branch or undertake a merger or
But to earn high ratings, banks were forced to make increasingly risky loans to
borrowers who wouldn't qualify for a mortgage under normal standards of
creditworthiness. The CRA, made even more stringent during the Clinton
administration, trapped lenders in a Catch-22. "If they comply," wrote Loyola
College economist Thomas DiLorenzo, "they know they will have to suffer from
more loan defaults. If they don't comply, they face financial penalties . . .
which can cost a large corporation like Bank of America billions of dollars."
Banks nationwide thus ended up making more and more "subprime" loans and
agreeing to dangerously lax underwriting standards no down payment, no
verification of income, interest-only payment plans, weak credit history. If
they tried to compensate for the higher risks they were taking by charging
higher interest rates, they were accused of unfairly steering borrowers into
"predatory" loans they couldn't afford.
Trapped in a no-win situation entirely of the government's making, lenders
could only hope that home prices would continue to rise, staving off the
inevitable collapse. But once the housing bubble burst, there was no escape.
Mortgage lenders have been bankrupted, thousands of subprime homeowners have
been foreclosed on, and countless would-be borrowers can no longer get credit.
The financial fallout has hurt investors around the world. And all of it thanks
to the government, which was sure it understood the credit industry better than
the free market did, and confidently created the conditions that made disaster
"No man's life, liberty, or property is safe," warned Mark Twain, "while
Congress is in session." Mark Twain was a humorist, but that was no joke.
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