Open Letter to a Believer in Miracles

by Don Boudreaux on September 7, 2011

in Housing, Myths and Fallacies, Not from the Onion, Reality Is Not Optional

Mr. David A. Benson
Sacramento, CA

Dear Mr. Benson:

You’re the moving force behind a California ballot initiative that, as reported in the August 17 issue of Business Law Daily, would “ban lender-initiated home foreclosures” and “make home ownership a fundamental right” (“California Ballot Proposal Would Ban Home Foreclosures“).

Way cool!

Trusting your insight (and why not trust someone as caring and politically active as you obviously are?), I gather that you’ve figured out how to produce valuable goods merely by officially inscribing words in government documents.

As I say, waaaay cool!  But now I must ask: if everyone can be guaranteed what in effect would be a debt-free home merely by amending a state constitution, why stop with homeownership?  Why not put to full use the miraculous powers that you’ve obviously learned to extract from mere ink on parchment?  Let’s also make automobile ownership “a fundamental right.”

Heck, even that’s thinking too small!  Let’s give everyone a “fundamental right” to own both a yacht and a private jet!

A power so stupendous and costless as the one you’ve identified ought to be used to its full capacity – which, given the nature of this power, apparently knows no limits.

Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

(HT Morganovich)

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PrometheeFeu September 7, 2011 at 5:58 pm

I’m fearful that could actually pass. A lot of people might think they are “sticking it to the bankers” and vote for such a stupid legislation. God I hope it fails to get on the ballot.

Frank33328 September 7, 2011 at 6:43 pm

Personally, I hope it passes.

Methinks1776 September 7, 2011 at 7:13 pm

It has in the past. During the Depression 27 states passed similar legislation with predictable consequences.

Here’s a link to a synopsis of a paper by the St. Louis Fed on the subject (there’s a link in the text to the paper).

conclusion: foreclosure moratoria tend to encourage lenders to reduce the supply of loans and may lead to higher average interest rates for subsequent borrowers.

cmprostreet September 7, 2011 at 9:44 pm

Yeah, but who could possibly have seen that coming? Besides, that only happened last time when they had the wrong people. This time it will be way better.

Given that there’s a fixed amount of wealth to go around, and that neither people nor banks ever alter their behavior when circumstances change, taking houses away from banks must mean there’s more houses left for people! How can you not understand this?

It actually gave me a headache to type that.

Dan J September 8, 2011 at 2:21 am

They will be sued for discrimination by Obamas racist DOJ……. Oh, they are suing them now on zero cases but on stats alone.

morganovich September 8, 2011 at 10:16 am

this could not be a clearer example of the tyranny of the majority out framers so rightly feared.

this is just attempted theft by democracy.

they invent a right that cannot be a right, then use it to steal. it’s mind bogglingly perverse.

a right cannot force others to perform positive actions. eg. a right to healthcare makes slaves of doctors.

if this works, what’s next? how about a vote that all employers must distribute all cash at their companies equally among all workers?

after all, profits are just profiteering. make them give it back!

i am glad i moved out of California.

Jim September 7, 2011 at 10:35 pm

If it passes (and it won’t — there aren’t enough people dumb as Peggy Joseph I hope Californians will be ostracized by mortgage lenders and have to pay up front for their homes in cash — which will do wonders for the economies of Washington, Nevada, Arizona, Oregon, Canada and Mexico.

California has been bleeding by a thousands cuts. Something this monumentally stupid and economically backwards would cripple CA.

Thankfully, our Constitution would prevail and likely nullify such an egregious proposal that violates retroactively contracts privately entered into.

morganovich September 8, 2011 at 10:00 am


if only this issue could be ring fenced in that way.

however, it cannot.

mortgages will disappear in california. this will drop home prices by 80-90%. according to the provisions of the prop, this means lenders will have to write down the principal on the loans.

CA is about 15% of the us housing market (by units) and more by dollars.

oops, 13%+ of the whole us mortgage portfolio just disappeared.

this would wreck every lender in the US in a cataclysm that made 2008 look like a blip.

nullification of private contracts retroactively is not a constitutional defense. look at the mortgage cram down legislation that was already federally mandated.

if this were a bill in the state legislature, i’d laugh it off, but as a prop subject to direct democracy and promising free stuff while “sticking it to the evil banks”, i’m a bit more nervous. you never want to bet on the economic literacy and ability to foresee consequences of Californians.

Methinks1776 September 8, 2011 at 10:51 am


This bill is typical of the idiocy we’ve learned to expect from California. It’s a disaster

The market disagrees with you on the probability of passage.

If the probability were high, the IYR would have tanked. It hasn’t.

morganovich September 8, 2011 at 3:19 pm


i don;t think that’s the whole issue.

it has a shot at passage.

it has no shot at being implemented.

if it passed, it would immediately be tied up in court and would almost certainly be nullified.

you can’t create a “right” to someone else’s property.

Methinks1776 September 8, 2011 at 3:28 pm


you can’t create a “right” to someone else’s property.

Oh yes you can! Just not without monstrous consequences!

I’m thinking of what happened to private during communist revolutions, obviously.

Yes, this country can be turned into another hellhole given enough effort.

Nickolaus September 7, 2011 at 5:59 pm

We already knew that this magical power existed! For instance, look how much poverty has been eradicated through the minimum wage law. Or how all racial discrimination has been wiped out because of the civil rights act. And all it took was giving the right people a pen, paper, a salary at least 3 times the median household income and a benefits package.

Mogden September 7, 2011 at 6:03 pm

I can’t imagine the clusterf— if this actually passes. Since I enjoy entertainment, I may vote for it.

Curious September 8, 2011 at 2:55 am

:-) I agree!

Mogden September 7, 2011 at 6:05 pm

Hey, it treats property tax the same way as the mortgage. No reason to pay that sucker any more!

morganovich September 8, 2011 at 10:05 am


i though of that too, but i think it’s a non starter. they can come after all your assets for delinquent taxes, not just your home. they can freeze bank accounts, garnish wages, and all manner of other nastiness.

the government is VERY good at getting paid.

banks could try to do similar things with full recourse loans like the ones in canada, but i’m not even sure that’s legal in california.

regardless, the inability to use the house as collateral would make it an unsecured loan. you’d pay credit card style interest unless you could put up other assets as collateral, and even then, you’d pay more and get far less money.

few people have liquid assets they could put in escrow of value equal to their home.

Rugby1 September 7, 2011 at 6:21 pm

The California legislative body is nothing but a bunch of wackadoos. With this bill, The Nanny Bill, and the California Dream Act all close to passing both houses and being signed into law by the governor I am unfortunately waiting for our state’s economy to grind to a halt.

I never understand how people can say big government, liberal policies work so well when you can see the effects of ithose policies on states like NJ and CA. Once a hot bed of commerce the government is slowly squeezing the life out of our economy.


Methinks1776 September 7, 2011 at 7:03 pm


Rugby1 September 7, 2011 at 7:54 pm


Wishful thinking.

Chucklehead September 8, 2011 at 12:32 am

As a wackadoo, I resent being compared to California’s legislative body.

morganovich September 8, 2011 at 10:06 am


this is not in the legislature. california uses a great deal of direct democracy. this is a proposition to go on the ballot as a referendum and be voted on directly by the people.

Rugby1 September 8, 2011 at 11:46 am

@ Morganovich

You are absolutely correct I should have read more closely.


Dave E September 7, 2011 at 7:20 pm

I would like a pony, please.

Would this shut down mortgage lending? I don’t think I’d be writing any in California if this were the law.

Craig September 7, 2011 at 7:20 pm

The only purpose of a bill like this can be to hasten the departure of private banks from the mortgage market. Then, it’s assumed, the government would have to step in and issue mortgages much as it now issues student loans. The final politicization of property ownership — before it’s disallowed altogether.

Chucklehead September 8, 2011 at 12:42 am

As banks refuse to give mortgages. more homes don’t sell. This would cause more downward pressure on home prices, causing more defaults and a continued downward spiral. More banks would fail, more wealth transferred from other states to bail out depositors via FDIC.
Prices would stabilize where renting provides enough positive cash flow that investors with commercial loans or REITs would by the property and rent them out. This would be a boom to property management companies for one.
What would be the other effects?

Dan J September 8, 2011 at 2:24 am

I fear that you are correct.

morganovich September 8, 2011 at 10:10 am


in general, when mortgages first become available in a market, you get a rapid 400-500% appreciation in price.

see Russia and Lebanon for good examples.

i see no reason why this would not also be true in reverse.

an 80% drop in CA real estate combined with the requirement per this proposition for banks to write down principal when value drops would wipe out every major lender in the US. 13% of their entire real estate portfolios would be gone.

Anon September 7, 2011 at 7:30 pm

I can’t follow the logic here. Why would any future lender offer a loan, especially for such a large investment, when they’d be unable to effectively take back collateral to secure repayment?

The Other Tim September 7, 2011 at 7:49 pm

Logic? This is about “rights,” silly…

Anon September 7, 2011 at 8:39 pm

Clearly I wasn’t thinking.

Jim September 7, 2011 at 10:37 pm

Can you imagine the amount of foreclosures that would take place before such a ballot initiative would take effect (assuming it is on the ballot?)

Foreclosures would skyrocket like crazy and people that are getting help now would likely just get screwed out of fear of passage.

Some solution.

Anon September 8, 2011 at 10:01 am

That, along with the reduction in future loans offered, means that this plan might be a great way to reduce the number of California homeowners.

paulroscelli September 7, 2011 at 8:17 pm

I am just so tired of living in this state. I think I am going to start voting for these statutes so that these pinheads get what they really deserve. Cal is the biggest argument in favor of federalism coupled with the fundamental right to travel–I think I’ll move.

kyle8 September 7, 2011 at 8:52 pm

My cousin sold his overpriced shack in Sacramento during the height of the housing bubble, he got over 1/2 million, he moved to the Fort worth area, bought a newer house 2 and a half times the size, bought a new car and still had money left over. And he does the same work, accounting, but doesn’t have to pay state income tax.

He used to lecture me on how great the Golden state was, now he has become a hard core Texan.

Chucklehead September 8, 2011 at 12:45 am


Nick September 7, 2011 at 9:24 pm

This is exactly why I left the state, the really nutty LA/SF left seem to run the state now. Under this lovely regime, we see business leaving the state in record numbers ( while the morons in Sacramento pass bills in attempts to collect sales tax on innovative companies like Amazon. Funny thing is despite the political rhetoric of “amazon needs to pay their fair share”, the bill explicitly excepted certain preferred rent seekers like Ebay. Now all the folks that worked at Amazon’s independent contractors are out of jobs, and the government is reporting they are getting far less revenue out of the bill than as previously thought. ( Hope Arizona likes those jobs.

Jameson September 7, 2011 at 9:40 pm

Like this guy says:

“The middle believes in magic.”

Methinks1776 September 7, 2011 at 10:05 pm

It’s almost like he’s the clueless middle. He thinks he lives in a democracy.

Thanks for posting that. Yarum Bauman;s Ten Principles of Economics is one of my favourite comedy bits.

M.R. Orlowski September 7, 2011 at 10:08 pm

You’ve captured the statist mindset perfectly, Don. Well done.

Mark September 7, 2011 at 11:22 pm

The real estate market in Sacramento is dreadful and many people there are under water on their houses, so I understand the perspective that Mr. Benson is coming from.

But bygod is this stupid.

Dan J September 8, 2011 at 2:41 am

This is so disturbing. I have little confidence in Libertarians and Conservatives in being able to turn back the hands of the clock and win the battle of words to get the dum-dumbs in the country to see how stupid something like this is. The sick and twisted marxists work so much harder at trying to destroy free will and free choice. I am disheartened.

SaulOhio September 8, 2011 at 5:52 am

How about applying it to health care, too? Oh wait, they do!

JS September 8, 2011 at 8:34 am

That would be the end of mortgaes in California. That’s all the banks need to say in response.

JH September 8, 2011 at 8:39 am

“California Ballot Proposal Would Ban Home Mortgages“

LoneSnark September 8, 2011 at 8:51 am

Not true. Risk does not determine mortgage lending or interest rates, but fannie and freddie. As such, California will see no ill effects from passage of this law as fannie and freddie will absorb all the losses for tax payers.

morganovich September 8, 2011 at 10:12 am


not the losses for mortgage already on the books that would need to be written down.

also: F+F have strict lending rules. they would not be able to lend uncollateralized without a change in their charters.

rbd September 8, 2011 at 9:01 am

I think this speaks badly of academia. Our teachers and professors have failed at teaching basic economics, otherwise preposterous proposals such as these would never see the light of day.

Alex Scrivener September 8, 2011 at 9:08 am

Hold up. I DO believe in miracles, and I still think this law would be a disaster.

Seth September 8, 2011 at 10:52 am

I could be wrong, but I think this happened in Rome.

Kevin September 8, 2011 at 1:25 pm

Well, banks were lambasted for relaxing their lending standards. If they can’t foreclose, they’ll jack their standards up through the roof and stick it to you on your credit score if you let them down! Good luck even getting a gift card after that, much less a credit card.

If laws then come out which attempt to correct for the massive rise in requirements, I’d expect to see lenders quickly begin to exit the California market.

If this passes, I agree with others that the likely end result, yeah, will be government-underwritten loans priced below the market rate, with the inevitable resulting losses “shared” by the people.

Forget the nation’s debt-to-GDP ratio, California’s going to become the next Greece all on its own!

Ken Prazak September 11, 2011 at 10:23 am

Count me among those who hopes it passes. California will become (if it not already has) exhibit A on how to totally screw up a state. I’m afraid things still have to get much worse before they get better. Bring on the historical trend.

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