The French Minister of Economy, Christine Lagarde, recently announced that the government will stimulate the housing market in an attempt to boost the economy. “Building and construction industry is a key sector, with important multiplier effect on the whole economy”, says Lagarde, “Our aim is to improve access to private property, knowing that only 58% of French citizens own their home, while the EU average is at 66%.”
The plan, Lagarde announced, consists in granting “zero rate loans”, that is a loan without interest, to those who wish to access to property for the first time. This measure, which is going to entirely substitute for the tax credit policy introduced after the 2007 election of President Sarkozy, is targeting low incomes households.
Should we congratulate the government for such initiative? Nothing is less sure. First of all, the idea that access to ownership is “a problem” in France is debatable. True, the average rate of property owners in Europe is higher than in France – the proportion is at 83% in Spain, 72% in Italy, 73% in Portugal and reaches a respectable 96% in Romania. But does Mrs. Lagarde really take those numbers as a good indicator of the quality of life? And if yes, how does she explain that one of the healthiest economies in Europe, Germany, can prosper with a proportion of property owners at a miserable 46%?
More importantly, the policy about to be introduced in France reminds us sadly of the way the “housing problem” was handled in the USA. There too, eager to encourage access to property, the federal government orchestrated the expansion of risky mortgages to under-qualified borrowers. At the core of the growth of nonprime lending was Congress’s strengthening of the Community Reinvestment Act, the Federal Housing Administration’s loosening of down-payment standards, and the Department of Housing and Urban Development’s pressuring lenders to extend mortgages to borrowers who previously would not have qualified.
There too, the government was complaining about banks’ hesitation to lend to some segments of the population and worked hard to get around those reluctances. The rest of the story is too well known: myriad of dysfunctions in the US economy. Indeed, such populist policy is responsible for the distortion of interest rates and asset prices and the diversion of loanable funds into the wrong sectors of the economy. Hence, normally robust financial institutions twisted into unsustainable positions. Everybody knows the consequences.
Why is it so difficult for politicians—and for the Minister of economy in particular—to understand that interest rates are prices and, like every other prices, are conveying information to market participants about the most profitable investments? When will our politicians get rid of their desire to plan the recovery of the economy? Playing with interest rates is at the origin of each economic and financial crisis, and the last one was no exception. To substitute itself to the market is not a sustainable and reasonable way for the government to boost the economy. What the government should be doing instead is to return to market participants their freedom to decide—under the guidance of prices—what direction should be given to their investments. We don’t need higher taxes, which proceeds are then used to subsidy banks forced to grant loans without interest payments. We need lower taxes. But tax cuts, obviously, are not on the agenda, at least not in France. The problem is not the market and the discipline of the price system; it is the fatal conceit prevailing among governments’ advisers that they can organize and direct the economy.