SAN FRANCISCO – One of the fundamental purposes of government is to advance important public goods. But, if not handled carefully, the pursuit of significant social goals can have unfortunate economic and financial consequences, sometimes even leading to systemic disruptions that undermine more than just the goals themselves.
This happened a decade ago in the United States, with the effort to expand home ownership. It has been playing out more recently in China, following an initiative to broaden stock-market participation. And it could happen again in the US, this time as the result of an attempt to improve access to funding for higher education.
In the first case, the US government eagerly supported efforts to make mortgages more affordable and accessible, including the creation of all sorts of “exotic” lending vehicles. The approach worked, but a little too well. The surge in debt-enabled demand drove up real-estate prices, while banks’ greater willingness to lend led many people to purchase homes they couldn’t afford. The collapse of the subsequent bubble – a major contributor to the 2008 global financial crisis – nearly tipped the world economy into a multi-year depression.
In China’s case, the government hoped that broader stock-market participation – achieved through efforts to bolster equity prices and promote lending for investment – would make citizens more open to pro-market reforms. Again, the approach proved too effective, and a bubble formed. Now, the government is trying to counter the risk of a disorderly deleveraging that would damage the Chinese economy and produce significant knock-on effects for the rest of the world.