Schumpeter, Mortgages and GSE's

As I mentioned in yesterday's post, there's a lot in McCraw's biography of Joseph Schumpeter to make you think. As I was working on my personal journal last night, this quote rang a bell.

As he put it in 1921, the essence of the economy lay not in paper securities or even in production equipment "but in the psychological relations between people and in the mental state of the individual." The crucial element was capitalism's orientation toward the future; but when the future looked bleak, people were reluctant to take risks. "The spiritual community is an infinitely complex and sensitive organism," and it is "each individual industrialist or merchant who sets afloat his own little boat."

I was struck by McCraw's appreciation of Schumpeter's orientation toward the future. Schumpeter believed that a real capitalist system can survive only if it is forward-looking. My first reaction was to use the quote as a follow-up to my post of a few days ago on PPP and NNN and how our expectations are important to future economic performance. It does no good to either overplay the negative or underplay the problems. Either keeps the market from assessing reality. Then, upon getting to the office and checking through the morning mix of media, I ran across some other items that, at least in my mind, linked to what Schumpeter was saying.

The first was this short piece from the Federal Reserve Bank of St. Louis Monetary Trends. It provides some interesting insights to the number and type of mortgage originations from 2000 through 2006 and linking those originations to the interest rate on traditional 30-year mortgages. The data, in turn, reminded me of this post on the Creative Capitalism blog by Larry Summers (HT to Econlog). In it, he cautions about what happens when we (read government) try to get "too" creative with capitalism and distort the messages to buyers and sellers that is inherent in price.

That was then reinforced by a couple pieces in The Washington Post. The first is about legislation being shaped to support Fannie and Freddie, even though we've heard repeatedly how both organizations are fine. The second speaks to how some parts of the support package are being modified. It seems that the upper limit on qualifying mortgages is being raised - certainly above what I would consider lower and middle income, but I may be out of touch with the size and price of homes for people in those income brackets.

Now, we come to the final icing on the cake. I opened The Wall Street Journal to find an opinion piece on economic leadership by Karl Rove. Putting aside my sense of irony, I read it anyway. In it, he writes about reform for Fannie and Freddie and points out how Fannie and Freddie secure jumbo loans (see previous paragraph) and how much of the combined GSE's budgets are spent securing political support. This last point is reinforced by an item on the Yahoo Politico site.

Now, to get back to the opening of this blog, economic performance is shaped by expectations. Our expectations are shaped by the past and the present. We can share these news and opinion pieces with our students, or summarize them if necessary. But we also can then ask them how this issue shapes or might shape their expectations about the future economy - the economy they will inherit and live in.

Of course, they may plan on renting. But again, they may not be able to participate in a market shaped by the same rules. And the rules of individual markets are out of their control...aren't they?(HT on both the last links to Carpe Diem.) The rules we put in place, or the rules that we allow our representatives to put into place, shape our economy and ultimately our expectations. And our students need to be able to compare costs to benefits, short-run to long-run.

I look forward to your comments.