An Introduction to Modern Finance Theory, the Lending Equivalent of Modern Monetary Theory
July 31, 2023
Introduction
In our June Housing Market Indicators briefing, we introduced the concept of Modern Finance Theory (MFT), which we summarize as follows:
The government, in an effort to make housing and higher education more affordable and accessible, particularly among disadvantaged groups, and lower the wealth gap, implements policies to stimulate more demand. As the government guarantees most home and higher education lending and federal departments, agencies, and regulators control the finance and monetary systems, new policies can be implemented to correct any problems that ensue. Since the loans are owned or guaranteed by the taxpayers, politicians and bureaucrats will easily further their agenda by lending more money, providing easier payment terms, or reducing or postponing the debt.
Modern Finance Theory is the lending and finance equivalent of Modern Monetary Theory (MMT), which claims that the government can spend as much as it wants because it can always print more money to pay for its agenda without generating inflation.
Despite the recent bout of inflation painfully demonstrating the dangers of MMT, MFT is gaining acolytes. Just look at student loan finance, where the current constitutional and policy battles over student loan forgiveness and income-based monthly payments show how far this government-controlled area of finance has already fallen under the sway of MFT. Housing finance is proceeding down the MFT path as progressives are in the process of doing away with foreclosures, monthly payments, or even the obligation to ever repay. These types of lending are no longer finance but an entitlement program beholden to political whims and intended to curry favors with voters.
There are enough recent home lending examples to demonstrate how MFT is creeping into this area of finance. It is important to refute the key MFT assertions before it’s too late.
