There is no doubt that the housing crisis was caused by government policy. Bad actors everywhere? Sure. But at the root of it all the was the government’s desire – by both parties – to increase home ownership in America. And specifically for the poor and minorities.
There is no doubt what really happened. Between 1997 and 2007, HUD’s affordable-housing policies under two administrations built an enormous mortgage bubble—nine times as large as any bubble in modern history—and when this bubble collapsed, it caused a 30%-40% decline in housing prices. This left homeowners who had limited financial resources and no equity in their houses unable to refinance or sell, causing an unprecedented number of mortgage defaults. Shocked by these numbers, investors fled mortgage-backed securities, making them useless for short-term financing by financial institutions like Lehman. The result was a panic and a financial crisis.
Indeed.
As I mentioned, there were guilty actors everywhere. Everyone from the appraiser who fudge the home value to the banker who pressured lending agents to companies that engaged in fraud – guilty all.
But it was the government, through the agencies Freddie and Fannie that drove the whole failure.
Consider:
HUD was still at it in 2004, stating that “Millions of Americans with less than perfect credit or who cannot meet some of the tougher underwriting requirements of the prime market . . . rely on subprime lenders for access to mortgage financing. If the GSEs reach deeper into the subprime market, more borrowers will benefit from the advantages that greater stability and standardization create.”
That statement is all you need to understand why, in 2008, 74% of the subprime mortgages outstanding in the U.S. financial system were on the books of government agencies, particularly Fannie and Freddie.
Except WITHOUT A DOUBT the government DID NOT cause the housing bubble. It was caused by lack of government – deregulation of derivative bond trading which led big banks to demand more mortgages, almost all of it NOT sub prime or people who are poor being urged to buy houses (that could not have caused a bubble, there’s not enough of those mortages out there). The bubble was caused by people speculating, mortgage brokers having no standards (due to lack of regulation and banks buying any mortgage they could). The lesson: we need regulation. We can’t trust the market – the market will ultimately correct itself, but left to its own devices it creates bubbles and panics (historically that was true – look back at the 19th century before regulation). We need government – active government – for markets to work. (Read: the Myth of the Free Market by Mark Martinez for a real solid argument about how the state is absolutely necessary for the market to function – an active regulatory state).
Completely false. The “regulators” were too busy facilitating affirmative action loans for speculators to unload their tulips once they exhausted the existing supply of suckers, thus exacerbating the problem.
Except WITHOUT A DOUBT the government DID NOT cause the housing bubble.
I think that you need to accept the fact that the government is not the answer you think and/or want it to be. Of course the bubble was caused by decisions of the central government. Noble intentions, to be sure, but the unintended consequences are that people were entering into homes they had no business buying.
All for the political gain of home ownership rates.
We can’t trust the market – the market will ultimately correct itself, but left to its own devices it creates bubbles and panics
There are no bubbles or unnatural circumstances that aren’t facilitated by “regulation”.
There is no way to say the bubble was caused by the “central government.” The bubble was caused by big bank speculation and no regulation of the derivatives market. The bubble was not primarily poor people buying houses they couldn’t afford, but middle class taking loans that unregulated (or under regulated) banks and brokers were convincing them to take, often with weird terms designed to put off high payments. Bubbles are market creations. Markets before regulation were prone to massive panics – the business cycle. Regulation has made the business cycle less extreme and created more stable growth. The increase in growth of the last sixty years has directed corresponded with the growth of government. Government regulation of markets is necessary, otherwise markets will collapse. Markets do not work on their own, due to power differential. There is no magic, markets aren’t natural regulatory mechanisms – that is obvious if you study economics.
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