The Law Of Unintended Consequences

Often, well intentioned policymakers pass laws they believe will make the harsh world a bit more warm and fuzzy.  But often the blowback creates more problems than it solves.  This is the Law Of Unintended Consequences.  Consider the Americans with Disabilities Act (ADA) which was intended to safeguard disabled workers from discrimination.  A noble cause, but the data shows that after the ADA was passed, the employment of the disabled dropped.  Why?  Employers where so worried they couldn't discipline or fire bad workers who had a disability that they avoided hiring such workers in the first place.  Then there is the Endangered Species Act.  When landowners feared that their property may be becoming the habitat of a species on the endangered list, they would begin by cutting back on any vegetation that would serve as nesting sites for these species.  The net result was that the species in question would have an even more difficult climb to survival.

But the flagship example is the marriage between The Community Reinvestment Act (CRA) and government sponsored enterprises (GSEs).  It basically led to the housing bubble which broke late 2007 and the Great Recession that followed.  The intent of the CRA was noble.  It empowered federal regulators to pressure banks to make loans to low-income people.  We then had GSEs like Fanny Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) buying mortgages from banks.  Without these GSEs buying the mortgages, the banks would be limited on how many loans they could make.  The banks have a reserve requirement of 10%, and when they hit that limit, they stop loaning money.  But if a GSE buys the mortgage, then the bank has more money to lend.  By the end of 2007, government sponsored mortgages accounted for 81% of all mortgage loans in the US (Grant's Interest Rate Observer; May 30, 2008; 3) The seeds of destruction where now in place.  We had more and more money available to be given to sub-prime buyers who if it were not for the CRA would never have been considered for a loan because of the risk of default.  Was there also "predatory lending"?  You bet.  If a 3rd party (GSEs) is going to buy your mortgage, you have off-loaded the risk.  As the demand for housing continued to climb, so did the price.  It was just a matter of time before the bubble popped.

There are many more examples.  Just about every attempt to social engineer has a blowback.  Can we learn from the past to be more cautious  and look a bit more before we leap?  We can only hope.