Unintended Consequences

Several weeks ago, I read a Washington Post article on the President’s plan to overhaul the US housing market. In part, the plan will require larger down payments and higher fees for home loans. Without commenting on the merits or lack of merits on the plan, it is easy to understand the intended consequences. In the medium to long term, this plan should stabilize the banking industry’s capital base, and serve to phase out dependence of the US housing industry on Fannie Mae and Freddie Mac. To name a few, some anticipated consequences include a higher savings rate for the US consumer, a slowdown in home sales, appliance sales, and the home improvement industry. This expected drag on the economy may be largely offset by an increase in business lending due to a higher savings rate. What is more difficult to anticipate are the unintended consequences.

What are unintended consequences? For the purposes of this blog, unintended consequences are consequences, as a result of Government policy, which one would normally not anticipate, nor did the drafters of the policy intend to happen. In other words, they are unintended.

Unintended consequences can be both positive and negative.

There are those who feel the current unrest in the Middle East and North Africa is at least partially attributable to Fed’s loose monetary policy over the past three years. I am of the opinion that loose monetary policy will find a way to manifest itself as higher prices somewhere in the economy. The intended consequence was to stabilize asset prices, primarily real estate, and prevent a complete economic meltdown. Whether this happened or not is open to debate. What has happened is that commodity prices have raised. Egypt is the world’s largest importer of wheat. Wheat is priced in dollars, and the Fed has been overproducing dollars for more than two years. Consequently emerging markets throughout the world — and the food sector in particular — are suffering from rising inflation. Add to this, slow growth, high unemployment, general resentment for autocratic rule and the result is unrest in the Middle East and North Africa. For the US this poses some unpredictable consequences for energy markets and political stability in those regions. None of which were intended by the Fed’s loose monetary policy. If the long term result is more stable region with governments friendly to the US then the policy had positive unintended consequences, if things head in the other direction then the result is a negative unintended consequence.

Assuming the Administration’s plan to overhaul the housing market gets enacted, what are the unintended consequences? Frankly, I haven’t a clue, but I do enjoy the mental exercise of trying to forecast the unintended consequences. For example, we can safely predict that home sale growth is adversely affected. From this we can assume that apartment and rental rates will go up, leading to an increase in the production of rental inventory, where are the rentals built? What are the effects on US suburbs, does suburban population decrease, does urban population increase. If urban population increases, what happens to the sales of pickup trucks, small cars? If small car sales increase, do highway traffic deaths increase or decrease? From a financial, societal, cultural and economic stand point where does one place one’s bets? What do you think?