Inflationomics

Healthcare Meltdown

Back in the 1950s, it was the American dream to own one’s own home. And in time, it became a way to garner more votes for politicians to promise “affordable” housing, and every effort was made during the next 50 years to make that dream come true for as many people as possible. Eventually, “affordable” housing was made possible through “government sponsored enterprises” (GSEs) such as Fannie Mae and Freddie Mac, as well as the Department of Housing and Urban Development (HUD) with its efforts to force banks to make loans on an “affirmative action” basis.

The government’s goal of increasing homeownership was also furthered by relaxed lending standards and the Fed’s creation of artificially cheap credit. An increase in the money supply and a low fed funds rate flooded the banks with money that they, in turn, had to lend somewhere. It’s not surprising that many places cut corners with their lending practices. Some places couldn’t keep up with the paperwork to process the loans—the money was flowing so quickly! Every effort was made to extend the American dream to as many people as possible, regardless of their means. Money was ultimately taken from the taxpayers, from competing uses, and from would-be homeowners who could no longer afford a home because of the higher real estate prices. For a more detailed discussion of the causes of the real estate bubble and the subsequent financial crisis, see Meltdown by Thomas E. Woods, Jr.

By printing more money and lowering interest rates, the Fed gave people the signal that money was cheap, now was the time to borrow for that property, money will never be this cheap again, prices will only go up in the future. People were misdirected to spend money in ways and on things that they otherwise wouldn’t have. And then, after they were committed, interest rates went up, market conditions changed, they could no longer afford their purchases, they found themselves over-extended, and forced to make sacrifices either to keep that “cheap” property or give up everything else.

In short, the U.S. government’s goal of home ownership for everyone was not for everyone. Not everyone can afford a home, despite the cheap money, especially when the government can no longer maintain its subsidies and market forces inevitably re-assert themselves.

And now the Obama administration wants “affordable” health care for everyone…

In the short run, the added demand for health care will raise prices, encourage health care providers to cut corners, and induce users to use the cheap services whether they need them or not. We’ll also need Government Sponsored Enterprises to make sure health care is administered the way the government wants it to be.

Then there’s also the question of who will pay for additional health care. Not surprisingly, only profitable businesses can “afford” health care for their employees, so ultimately the money to cover the additional health care expense will come from profitable businesses, whether directly or indirectly by way of a tax. Of course, there aren’t enough profitable businesses and/or “rich” people to tax (or else they will no longer be profitable or rich). Thus, in the long run, the government will have to subsidize/nationalize employee health care and print more money to pay for it.

At some point, when enough people realize that the U.S. economy can’t afford to subsidize health care, the government will change its policy and the bubble will burst in the health care industry. Same idea, different American dream.

Robert Jackson Smith

For comments, suggestions, or replies to the author, please e-mail