- Sowell, Thomas.
The Housing Boom and Bust.
2nd. ed.
New York: Basic Books, [2009] 2010.
ISBN 978-0-465-01986-1.
-
If you rely upon the statist legacy media for information regarding
the ongoing financial crisis triggered by the collapse of the real estate
bubble in certain urban markets in the United States,
everything you know is wrong. This
book is a crystal-clear antidote to the fog of disinformation
emanating from the politicians and their enablers in media
and academia.
If, as five or six people still do, you pay attention to the legacy media
in the United States, you'll hear that there was a nationwide crisis
in the availability of affordable housing, and that government moved
to enable more people to become homeowners. The lack of regulation
caused lenders to make risky loans and resell them as “toxic assets”
which nobody could actually value, and these flimsy pieces of paper were
sold around the world as if they were really worth something.
Everything you know is wrong.
In fact, there never was a nationwide affordable housing crisis.
The percentage of family income spent on housing nationwide
fell in the nineties and oughties. The bubble market in
real estate was largely confined to a small number of communities
which had enacted severe restrictions upon development that reduced
the supply of housing—in fact, of 26 urban areas rated as “severely
unaffordable”, 23 had adopted “smart growth” policies.
(Rule of thumb: whenever government calls something “smart”,
it's a safe bet that it's dumb.)
But the bubble was concentrated in the collectivist enclaves where the
chattering class swarm and multiply: New York, San Francisco, Los
Angeles, Washington, Boston, and hence featured in the media, ignoring
markets such as Dallas and Houston where, in the absence of limits on
development, housing prices were stable.
As Eric Sevareid observed, “The chief cause of problems is
solutions”, and this has never been better demonstrated than in the
sorry sequence of interventions in the market documented here.
Let's briefly sketch the “problems” and “solutions”
which, over decades, were the proximate cause of the present calamity.
First of all, back in the New Deal, politicians decided the
problem of low rates of home ownership and the moribund
construction industry of the Depression could be addressed
by the solution of government (or government sponsored)
institutions to provide an aftermarket in mortgages by banks,
which could then sell the mortgages on their books and free up
the capital to make new loans. When the economy started to
grow rapidly after the end of World War II, this solution caused a
boom in residential construction, enabling working class families
to buy new houses in the rapidly expanding suburbs. This was seen
as a problem, “suburban sprawl”, to which local
politicians, particularly in well-heeled communities on the
East and West coasts, responded with the solution of enacting
land use restrictions (open space, minimum lot sizes, etc.) to
keep the “essential character” of their communities
from being changed by an invasion of
hoi polloi and their houses made of ticky-tacky, all
the same. This restriction of the supply of housing predictably
led to a rapid rise in the price of housing in these markets
(while growth-oriented markets without such restrictions experienced
little nor no housing price
increases, even at the height of the bubble). The increase in
the price of housing priced more and more people out of the
market, particularly younger first-time home buyers and minorities,
which politicians proclaimed as an “affordable housing crisis”,
and supposed, contrary to readily-available evidence, was a national
phenomenon. They enacted solutions, such as the Community Reinvestment
Act, regulation which required lenders to effectively meet quotas of
low-income and minority mortgage lending, which compelled lenders to
make loans their usual standards of risk evaluation would have caused
them to decline. Expanding the pool of potential home buyers increased
the demand for housing, and with the supply fixed due to political
restrictions on development, the increase in housing prices
inevitably accelerated, pricing more people out of the market.
Politicians responded to this problem by encouraging lenders to
make loans which would have been considered unthinkably risky
just a few years before: no down payment loans, loans with a
low-ball “teaser” rate for the first few years which
reset to the prevailing rate thereafter, and even “liar loans”
where the borrower was not required to provide documentation of
income or net worth. These forms of “creative financing”
were, in fact, highly-leveraged bets upon the housing bubble
continuing—all would lead to massive defaults in the case of declining
or even stable valuations of houses.
Because any rational evaluation of the risk of securities based
upon the aggregation of these risky loans would cause investors
to price them accordingly, securities of Byzantine complexity were
created which allowed financial derivatives based upon them, with
what amounted to insurance provided by counterparty institutions,
which could receive high credit ratings by the government-endorsed
rating agencies (whose revenue stream depended upon granting
favourable ratings to these securities). These “mortgage-backed
securities” were then sold all around the world, and ended
up in the portfolios of banks, pension funds, and individual investors,
including this scrivener (saw it coming; sold while the selling was good).
Then, as always happens in financial bubbles, the music stopped.
Back in the days of ticker tape machines, you could hear
the popping of a bubble. The spasmodic buying by
the greatest fools of all would suddenly cease its clatter and an
ominous silence would ensue. Then, like the first raindrops which
presage a great deluge, you'd hear the tick-tick-tick of sell
orders being filled below the peak price. And then the machine would
start to chatter in earnest as sell orders flooded into the market,
stops were hit and taken out, and volume exploded to the downside.
So it has always been, and so it will always be. And so it was in
this case, although in the less liquid world of real estate
it took a little longer to play out.
As you'll note in these comments, and also in Sowell's book, the
words “politicians” and “government”
appear disproportionately as the subject of sentences which
describe each step in how a supposed problem became a solution which became
a problem. The legacy media would have you believe that
“predatory lenders”, “greedy Wall Street firms”,
“speculators”, and other nefarious private actors are
the causes of the present financial crisis. These players certainly
exist, and they've been evident as events have been played out,
but the essence of the situation is that all of them are
creations and inevitable consequences of the
financial environment created by politicians who are now blaming
others for the mess they created and calling for more “regulation”
by politicians (as if, in the long and sorry history of regulation, it
has ever made anything more “regular” than the collective
judgement of millions of people freely trading with one another in
an open market).
There are few people as talented as Thomas Sowell when it comes to
taking a complex situation spanning decades and crossing the
boundary of economics and politics, and then dissecting it out
into the essentials like an anatomy teacher, explaining in clear
as light prose the causes and effects, and the unintended and
yet entirely predictable consequences (for those acquainted with
basic economics) which led to the present mess. This
is a masterpiece of such work, and anybody who's interested in the
facts and details behind the obfuscatory foam emerging from the legacy media
will find this book an essential resource.
Dr. Sowell's books tend to be heavily footnoted, with not only
source citations but also expansions upon the discussion in the main text.
The present volume uses a different style, with a lengthy “Sources”
section, a full 19% of the book, listing citations for items in the
text in narrative form, chapter by chapter. Expressing these items
in text, without the abbreviations normally used in foot- or end-notes
balloons the length of this section and introduces much redundancy.
Perhaps it's due to the publisher feeling a plethora of footnotes
puts off the causal reader, but for me, footnotes just work
a lot better than these wordy source notes.
March 2010 