The Real Cause of the Housing Crisis

I've been a fan of Thomas Sowell since the early 90s when I read his brilliant book, "The Vision of the Anointed", a treatise on liberalism. Here he places the blame on the housing crisis right where it belongs...

Thomas Sowell: Regulators Started Housing Crisis

May 17, 2009

Respected economist Dr. Thomas Sowell, author of the new book "The Housing Boom and Bust," tells Newsmax that the current housing crisis can be blamed on pressure from government officials seeking to remedy a "problem that didn't exist."

Dr. Sowell also said politicians' stated concern about that so-called problem — a lack of affordable housing — is "a farce."

Newsmax.TV's Kathleen Walter asked Sowell what caused the "house of cards" in the housing market to collapse.

"The most fundamental thing is that the money that was normally paid for monthly housing payments stopped coming in, or stopped coming in in the volumes that it had in the past," said Sowell, a senior fellow at the Hoover Institution at Stanford University.

"The question then is, why did that happen? And the reason that happened was that banks and other lending institutions began lending to people who did not meet the traditional standards for mortgage loans, but were given those loans under pressure from government regulators, and even in some cases under threats from the Department of Justice if their statistics didn't match what the Department of Justice thought they should be — for example, in terms of income levels, race, what communities they invested in, and so on."

Walter noted that Sowell asserts in his book that politicians in Washington were trying to solve a problem that didn't exist.

"The problem that didn't exist was a national problem of unaffordable housing," Sowell explained.

"The housing in particular areas, particularly coastal California and some other areas around the country, were just astronomically high. It was not uncommon for people to have to pay half of their family income just to put a roof over their head. So that was a very serious problem where it existed.

"But it existed in various coastal communities primarily and a couple of other places. Unfortunately, the elites whose strongholds are on the East and West Coasts don't seem to understand that there's a whole country in between, and in most of that country housing was quite affordable by all historical standards.

"So they set out to solve the problem by setting up a federal program to bring down the mortgage requirements, the 20 percent down payment and that sort of thing, and by forcing Fannie Mae and Freddie Mac to buy up those mortgages from the people who no longer had to meet the same requirements.

"The banks had no choice but to go along because the regulators controlled their fate. So the banks would simply sign up people, and sell the mortgages to Fannie Mae and Freddie Mac. It now became Fannie Mae and Freddie Mac's problem. And that meant it became the taxpayers' problem."

Walter asked: "Who is really responsible for all this?"

"There are a lot of people who were irresponsible," Sowell responded.

"But the fundamental problem, the problem of reduced lending standards, with people buying houses even with no money down in some cases, that all came precisely from the regulators that people are now talking about as the salvation of the housing market.

"There's no such thing as regulation in the abstract. There are certain kinds of regulation that can have beneficial effects. Canada does not have the same problem that we have even though they have regulations. But their regulators are trying to make sure that the banks and other lending institutions are obeying clear-cut rules. Ours were trying to produce higher statistics on home ownership in general, and in particular trying to reduce the gap between low-income people and high-income people, blacks and whites, et cetera."

Walter asked what Americans can do to ensure that the housing boom and bust will not happen again.

"First and foremost the voters have to learn to be skeptical and to find out what the facts are," Sowell said.

"There is not the slightest incentive for a politician to behave better in the future. If voters don't understand that, it's going to happen again.

"This is the worst housing crisis we've had but it is not the first. This very same drive to increase home ownership occurred under the Republicans in the '20s. It occurred under the Democrats in the '30s, and it occurred under both parties in the '40s and '50s.

"There is not the slightest incentive for politicians to learn from their mistakes because they pay no price for it. And they'll never pay a price for it as long as the voters don't make an effort to find out what is going on."

Sowell added: "I see absolutely no reason why politicians should take charge of which way prices go. That's precisely what led to the current disaster. . .

"When you realize how long politicians have been talking about a need for affordable housing, you realize what a farce it is."

Editor’s Note: To see the full Thomas Sowell interview, Go Here Now.

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