In short, government has been the principal factor preventing the "affordable housing" that politicians talk about so much.
Politicians have also been a key factor behind pushing lenders to lend to borrowers with lower prospects of being able to repay their loans.
The Community Reinvestment Act lets politicians pressure lenders to make loans to people they might not lend to otherwise - and the same politicians are quick to cry "exploitation" when the interest charged to high-risk borrowers reflects that risk.
The huge losses of subprime lenders, some of whom have gone bankrupt, demonstrate again the consequences of letting politicians try to micro-manage the economy.
Yet with all the finger-pointing in the media and in government, seldom is a finger pointed at the politicians at local, state and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them.
While financial markets are painfully adjusting, and lenders and borrowers are becoming less likely to take on so much risky "creative" financing, politicians show no sign of changing.
Why should they, when they have largely escaped blame for the disasters that their policies fostered?
(HT Instapundit)
3 comments:
Sowell's assignment of blame to the Community Reinvestment Act (CRA) makes little sense.
First, this act has been around since 1977: why didn't it produce these results earlier?
Second, the CRA only applies to depository institutions, i.e., banks. Many of the lenders involved in the subprime mortgage process were not even covered by the CRA. Indeed, the vast majority of nontraditional and subprime loans are issued outside the federally regulated banking system. Just as importantly, many of the investors who were buying mortages in the secondary market from mortgage companies were not covered by the CRA. So this blame on the CRA is rather puzzling.
I agree more with Sowell on the impact of local govt regulations on building and how that escalated real estate prices, although even that is stretching things a bit.
The bottom line of this problem is the same as that of any bubble: it's all human nature. People always seem to be searching for that next investment that is a sure way to quick wealth. You had the housing market take off and then people became intoxicated by the prospect of quick wealth. You had lenders willing to make risky loans to show sales. You had investors from all over the globe willing to buy those mortages. You had people with no real estate background trying to act like Donald Trump who had no business looking for loans and trying to flip homes.
Sowell identifies some peripheral influences, but it seems that he tries too much to make everything fit his template of too much government.
Here's a better explanation, from the comments section that accompanies Sowell's original article:
Prices for real estate are so high because Greenspan dropped interest rates to next to nothing. This move immediately made all real estate cheaper, and touched off a historic asset bubble.
Once prices rose to meet the drop in interest rates, the financial industry came up with "exotic" loans as a way to perpetuate the housing bubble and keep the party going. People who couldn't afford the new prices using traditional mortgages could now buy using "adjustable rate" loans, "stated-income" loans, etc. The widespread use of these loans allowed prices to go up some more.
Good assessement--Human greed was the major factor BUT--the train started with the concept that the government (NOT the market) should control who gets to buy a house. If they had left well-enough alone after fixing the "redline" problem, we would not be in this mess.
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