Stephen Meister argues that government caused the housing bubble:
Federal policy was the chief cause of the crisis. Prior to the end of World War II, the percentage of US home ownership ran well below 50 percent; after the war -- with Veterans Administration assistance to returning GIs -- we saw it climb into the low 60s. But, as the chart above shows, it didn't skyrocket until mid-1990s, when the Clinton administration began pushing its "affordable homeownership" agenda.
In 1996, HUD set an explicit target, commanding that 42 percent of the loans bought by Fannie and Freddie be to people with incomes below the area's median. That target rose to 50 percent before Clinton left office -- and was pushed even higher in the Bush years.
Meanwhile, Washington used the Community Reinvestment Act to muscle banks into making loans to minority borrowers with poor credit ratings who put down miniscule down payments.
On the other hand, one could say that the bubble would not have happened absent government pushing banks to loan more to people with weaker credit is like saying that the machine gun would not exist if gun powder did not exist. That's probably too strong, but it seems more reasonable to say that pushing banks to loan more to less qualified borrowers was a necessary, but not sufficient explanation of the bubble. It's a necessary, but not sufficient condition for the financial crisis.
Wish I had thought of that headline. Now I'll have to think up scenarios with Kirk and Spock in charge of Freddie and Fannie. Shouldn't be too hard, if I use the Kirk and Spock from the evil parallel universe where the real Fannie and Freddie existed.
Well, yes, but the GOP was implicated as well. The Jack Kemp school of thought was that the poor needed a stake in our capitalist society, and home ownership was the most obvious way of achieving that. And that's probably correct. Seems to me that the 30-year mortgage (which in combination with other policies doubled home ownership in this country) has had a stabilizing influence, making us even more center-right that we would have otherwise been. So let's not be overly critical here -- Clinton and Congress just went way overboard in the 1990s.
GOP and Jame Kemp??? I don't think so. This stinks of Jimmy Carter and socialism. Below is a link to a great City Journal article on the CRA written by Howard Husock in 2000 - long before the housing crisis meltdown. It is a long article, but will educated you Redwald on who is responsible for the housing crisis.
Dune and Star Trek references within two days... I love this blog.
Equally culpable in terms of the greed, sure. But the government legalized the greed. If a law were passed legalizing rape, there would be more rapes and we would rightly condemn all the rapists. But we should reserve the most condemnation for the "lawmakers" who made the rapists "legal" activity possible. In the case of the housing market, the government made moral hazard inevitable in more ways than one. Only the government can unleash greed on as great a scale as the housing scandale fostered.
If a law were passed legalizing rape. There would be no more rapes. There might still be non-consensual sex, this non-consensual sex would be punished by activist judges and prosecutors under a host of legal theories to include sexual harassment and battery. Battery which is the use of force against another, resulting in harmful or offensive contact can be a felony and would almost instantly clock the type of sentence range reserved for rape. Some minority feminists scholars and others have suggested legalizing rape, i.e. dropping its historical classification as a special form of battery. Actually it is much easier to get a battery conviction, and discretion would move to the judge and prosecutor. Furthermore juries in reaction would perhaps increase the conviction rate even further. It would actually probably result in changes in jury instructions and a host of due process challanges.
I certainly agree with you in regards, the complex web of incentives in the housing market, the government made moral hazard more likely. There was rent seeking by the housing industry and a host of federal tax credits, and deductions on both the individual and corporate side built into the tax code.
Redwald is correct, also Bush had the "ownership society" and it was packaged and sold on the right as a means of delivering that result. But I also think that not all of the incentives which had moral hazzards as side effects were detrimental on the whole. You will always have some possibility for fraud, abuse and gaming the system.
Even if you try to enter a criminal mind, and build around it, you will have weak points. Thankfully most criminals are rather stupid and don't read Sun Tzu.
Unfortunately legal incentives dealing with property are complex, and the abusers are always simply shades of "gray", and often times do retain lawyers who act as generals in the art of war.
Neverthless a majority are rather hapless and unsophisticated, and in the housing market this was the case.
That is home ownership, like education (which is still in a bubble) is something of value. Its value is a question of fact, and questions of fact occilate in value.
The market can be bullish for a long time, it can be bearish for a long time, all sorts of wacky things can act to influence events, mood and opinions concerning value.
I am not a believer in random walk as it concerns the market or the market for political ideas, there are irrational choke points. But a massive number of considerations do end up being priced into government, albeit with a natural and somewhat reasonable bias for the short run.
I suppose congress gets paid in both money and recognition, but I still think a decent chunk of this is unmerited. Lawmakers are as often as not agents of the people, and trapped in similar expectations bubbles.
The laws they make are never so radical as legalizing rape, nor in a world where the slack was not taken up by alternative legal theories would they be blammed because such would represent a major societal shift, itself likely a buble that to my limited comprehension would mean that men were angels or beasts.
With a straight face you could argue that the decline in 1983 actions since the 1970's fueled by a strong favoritism for granting Summary Judgment to state actors is a defacto legalization of prison rape. Technically it is still prosecuted, but this is also underfunded.
But this isn't an area that gets attention, unless you count the ACLU.
If some legal issues and policy preferences are frequently spawning bubbles, the bubbles are in areas that everyone recognizes as intrinsically valuable. Bubbles don't form unless democrats and republicans are competing like mad to outdo themselves, and overpay in the realm of incentives and stimulus so as to look good.
Bi-partisanship feeds bubbles, or just as bad partisanship competing to outdo partisanship in the same direction.
When everyone who counts and is using the common sense or reliance interest of the moment is of a like mind on the intrinsic value of a particular underlying good bubbles form.
Bubbles just don't form around legalizing rape, unless you are flexible and grant being close minded about such a ridiculous proposition to be a "bubble". see Peter Singer and murdering 2 year olds.
Mr. Lewis, I think that the analogy was lost on you. For God's sake, I wasn't suggesting that rape be legalized, which apparently you have given quite a bit of thought! Legalization not only permits but even encourages the activity in question. That was the point.
What our government was doing was subsidizing the housing market. This inflated prices (as it has done to college tuitions, as another example we have discussed here) and the whole market. It inflated both supply and demand -- more buyers as well as incentive to builders to build more to meet that demand. The political reasons were sweet; every American who aspires to own a home ought to have the opportunity. Except for the financing issue, that was always true. All you needed was the money.
What Meister wrote is true. Economists were writing about the hazards of government making the money for owning a home too easily available since there was a Freddie Mac and Fannie Mae. Who listens to them?
The only reason what he writes is not wholly adequate as explanation is that nothing like this happens in isolation. It pulls the fabric of the whole economy and other things pull, too, or pull back, and here we are coping with the shreds. The whole thing could be repaired, but what the Obama Admin. seems to be doing is exacerbating the tensions that that ripped up the market in the first place.
I know lots of self-governing people who benefited from government programs, on all levels of government, designed to help first-time home buyers. I have a son who bought a lovely house in town with no down-payment through a combination of programs, local, state and national. He pays his mortgage, keeps up his property, is hugely grateful for this opportunity since they had the debt of years of medical bills from my daughter-in-law's chronic illness that would have kept them in cheap apartments forever, otherwise.
Therefore, I don't think it is like legalizing rape and "Bi-partisanship feeds bubbles" only if government takes a hand in distorting markets.
I picked a deliberately provocative analogy to government subsidizing the housing market, but it does not mean that they are equivalent. Surely rape is worse, but the apparent benigness (?) of a housing subsidy obscures the fact that it not only distorts the market, but encourages clever ways to make money from deals that are apparent losers for the lenders and financers. That's why so many bad mortgages were "bundled," to mitigate the effect, and relying upon the GSEs to cover losses. Sure, good people will put easy money to good use, but many more not so good people will not. Back to the rape analogy, out of all the crimes committed there might be some happy pairings, but that hardly justifies the general policy, which was unnecessary for the happy couples, even an insult!
The fact is, politicians distort markets to further non-market goals (in this case, to create political interests favorable to the market economy - at least that was the GOP's motivation). Better get used to it, because the temptation is just too grdeat.
The only real protection is vigilance and electing sensible, moderate people who understand that subsidizing anything needs to be done modestly and with circumspection. And, as a rule of thumb, they must understand that avoiding boondoggles (e.g., AMTRAK) is paramount. Policy can tweak the markets but never substitute for them.
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