Sunday, July 26, 2009

Crisis of a House Inflated

American Enterprise Institute's Nick Schulz interviews Thomas Sowell about his latest book, The Housing Boom and Bust:

Q: What is the greatest popular misconception about the housing boom and subsequent bust?

A: The biggest popular misconception about the housing boom and bust is that it was due to a lack of regulation. In reality, it was precisely the intervention of federal regulators that caused traditional mortgage lending standards to be reduced, leading to sales of homes to many people who either could not or would not pay for them.

One regulatory solution? I would get rid of Fannie Mae and Freddie Mac entirely. As long as these hybrid private and government enterprises exist, they will be a standing invitation to politically motivated decisions.


At 7/26/2009 10:01 AM, Anonymous gettingrational said...

I once made a withdrawl from a credit union and was not asked for ID. I said to the employee arn't you going to ask for identification. The reply was a very nonchalant "we have insurance to cover fraudlent withdrawls". I shrugged my shoulders and left with a couple of hundred bucks.

Fannie Mae and Freddie Mac provide the same backstop insurance to lackadaisacal handing out of funds.
The FHA is better way to encourage home ownership assuming no meddling for looser lending standards.

At 7/26/2009 10:38 AM, Blogger Alan said...

this is a very good post and something that people need to hammer home over the next 3 years. Capitulating to the political winds only gives us a bigger mess than when we started. If Bush had stuck to his guns to get rid of Freddie and Fannie and had vetoed SOX we'd be in a much better place today.

At 7/26/2009 10:41 AM, Anonymous Anonymous said...

I must concur.

The housing market explored as would any tradegy of the commons. Like any other tradegy of commons situation mixed property rights leads to over use of a resoruce. While many saw the problem ahead they were incented to keep playing because to stop led to immediate losses.

At 7/26/2009 1:49 PM, Anonymous Benny The Libertarian said...

Yeah, I notice nobody ever wants to mention the mortgage interest tax deduction.
Canada does not have it, and had a much smaller housing price bubble.
The nanny-state tax expenditure side of the budget needs equal paring to the spending side.

At 7/26/2009 2:01 PM, Anonymous Anonymous said...

And Congress wants to force insurance companies to lower standards, to take in unprofitable business. Won't that be a fun bubble?

--Best wishes from Kansas

At 7/26/2009 3:38 PM, Anonymous Anonymous said...

Wow, sounds exactly like my 22 page sophomore thesis I wrote this spring.

At 7/26/2009 4:30 PM, Anonymous Benny The Libertarian said...

Anon: Are you Robert Miller?

At 7/26/2009 5:49 PM, Blogger PeakTrader said...

It should be noted, homeownership tends to make people more responsible. Many lower income Americans were able to buy houses that doubled and tripled in value, many extracted over $100,000 of equity, including for home improvements, or were able to live in their homes for free, e.g. for a year, until the home was repossessed.

Also, to answer QT, the proliferation of securitization and excessive leverage were symptoms of excessive capital (e.g. a record 20 consecutive quarters of U.S. double-digit earnings growth, by U.S. corporations, and massive foreign capital inflows). There was a massive shift of real wealth from lenders, including foreigners, to borrowers, including lower income Americans.

Moreover, it should be noted the Fed works in the future economy, because of lags in the adjustment process. It began the easing cycle in Aug '07, and in spite of sharply rising commodity prices (e.g. oil prices peaked at about $150 in mid-'08, which was an oil shock that was twice as big in real dollars than the shocks of the '70s).

At 7/26/2009 8:48 PM, Blogger KO said...

And remember this is one of few assets you can sell at a gain and have no capital gains taxes. It had previously been restricted to trading up or a 1 time exemption after you turned 55.

Clinton turned that into effectively every 2 years and increased the amount when he cut capital gains taxes.

At 7/27/2009 6:14 AM, Blogger juandos said...

Nothing like a little common sense from Thomas Sowell: "I would get rid of Fannie Mae and Freddie Mac entirely. As long as these hybrid private and government enterprises exist, they will be a standing invitation to politically motivated decisions."...


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