Maybe an Economics for Nitwits coloring book would help

Sub-prime public ed and a double dose of moral hazard

by Craig J. Cantoni

It's difficult to find a better example of the sub-prime nature of public education than the sub-prime mortgage mess.

To wit: According to The Wall Street Journal, the average mortgage payment for the typical sub-prime borrower was a whopping 45 percent of the borrower's pre-tax income. That staggering amount was the initial amount and not future reset amounts.

Apparently, Americans are graduating from high school without the math skills to calculate their pre-tax income, after-tax income, living expenses, and the financial cushion they need in the event of unanticipated expenses. Gee, my poor, uneducated grandparents emigrated from Italy and could perform such calculations.

It also appears that Americans are not learning economics and history in school. If they were learning such subjects, they'd know about real estate booms and busts, including the recent decade-long bust in Japan. They'd know that between 1900 and 2004, real estate appreciated in real terms only about 0.5 percent a year. And they'd know how government monetary policy can produce easy money, inflate asset prices, and eventually lead to deflation.

Call me a cynic, but I don't believe that it is in the best interest of government schools to teach students about the foolishness of federal housing policies and the economic damage that can be done by government printing presses. Contrary to what the government has led us to believe, housing is a bad investment for many people. Of course, the public school establishment loves real estate inflation, because school taxes are based primarily on real estate values.

To be fair, other countries are also producing nitwits. To wit: Today's edition of The Wall Street Journal has a front-page story about Brazilian immigrants who took out sub-prime mortgages. One couple secured one for $713,000. The husband is a taxi driver, and the wife, a house cleaner. They had told the loan officer that they could afford a monthly payment of $3,500. Another Brazilian, a baby sitter, took out a $495,000 mortgage.

By comparison, I sold the home of my working-class parents four years ago after the death of my dad. They bought the home 64 years ago for $5,000 and invested 60 years of sweat equity in renovating it. It sold for $156,000. Approximately $45,000 of that amount was monetary inflation.

Now, having created a financial tsunami, the government is preparing to create a moral hazard, which will only serve to delay and intensify the tsunami. Our compassionate politicians are going to pressure or force lenders to bail out borrowers, thus creating an expectation, or moral hazard, that the government will bail out dumbbells in the future, which, in turn, will create more dumbbells.

But that moral hazard pales in comparison to the moral hazard created by 70 years of entitlements and social welfare. Americans have been deceived to believe that the government will take care of them in old age, thus creating a mindset that they don't have to save for old age. Our sorry savings rate reflects this mindset.

An educated person might respond that the savings rate is higher in France and other European countries, yet Europeans have even more social welfare than the United States. True, but Europeans, unlike Americans, have a more recent experience of how governments can destroy economies. In spite of their professed love of government, they have a bag of diamonds, gold, and silverware under the mattress, literally and figuratively speaking.

Many Americans are so poorly educated that they are awestruck by the likes of Barack Obama, who recently said that if he were president he would restrict what credit-card companies could charge in interest. The lumpenproletariat didn't notice that he said nothing about the government forcing Americans into debt. How much debt? Well, the unfunded liabilities for Social Security and Medicare alone come to about $260,000 for each adult American. To compare, the average credit-card debt is $8,000.

Gotta sign off now. I'm putting a bag of diamonds, gold, and silverware under the mattress.
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Mr. Cantoni is an author, columnist, and founder of Honest Americans Against Legal Theft (www.haalt.org). He can be reached at ccan2@aol.com.