With Obama’s announcement that he is interested in creating conditions that will lead to another housing bubble, it’s interesting to go back and revisit the conditions that led to the most recent bubble.
It has long been my position that it was the government that was responsible for the conditions that created the housing bubble that burst in 2007. That it was the government’s role in pushing home ownership levels to higher and higher values that eventually led to the condition where people who couldn’t afford homes finally began to default resulting in the crisis. A crisis that we haven’t truly recovered from.
To be sure, there were private industry players that contributed to the crisis. There were vehicles that were created that also led to that crisis. But, in the end, it was the government’s desire to increase home ownership among lower income and “at-risk” households that drove the poor behavior of those private individuals and the creation of those vehicles.
Not everyone agrees with me. In fact, blog favorite Scott Erb often takes me to task, most recently in the comments of the above post. More specifically, he’s pointed me to a book that he claims supports his position: “All The Devils Are Here”.
As part of my attempt to make MY case, I’ll be quoting from this book in an effort to show that it was government goals that was the genesis of the whole meltdown.
Here’s the first such example:
Here’s a surprising fact: it was the government, not Wall Street, that first securitized modern mortgages. Ginnie Mae came first, selling securities beginning in 1970 that consisted of FHA and VA loans, and guaranteeing the payment of principal and interest. A year later, Freddie Mac issued the first mortgage-backed securities using conventional mortgages, also with principal and interest guaranteed. In doing so, it was taking on the risk that the borrower might default , while transferring the interest rate risk from the S&L to a third party party: investors. Soon, Freddie was using Wall Street to market its securities. Volume grew slowly. It was not a huge success.
In the example above, it would be my position that the government created the conditions that eventually led to Wall Street marketing those loans in the early 70’s. Did Wall Street actors engage and participate in the process? Sure, it’s clear they did. Were they all above board? Perhaps but likely not. However, the initial push, the lighting that struck primordial mud and created carbon life was government.
And it’s my case that the same thing happened long ago that resulted in the crash of 2006-2007.