Who was really responsible for the catastrophic hosing collapse of 2008? According to celebrated economist Thomas Sowell, there’s plenty of blame to go around – and both Wall Street and the government share responsibility for the boom and spectacular bust. In a chat with host Jason Hartman on a recent Flash Back Friday episode of the Creating Wealth Show, Sowell discusses the anatomy of the collapse, and offers some predictions for the future.
As with all Flash Back Friday episodes, Jason reminds viewers that the information they’re hearing isn’t current. The replay represents the best of the Creating Wealth Show’s vast archives of podcasts on investing and entrepreneurship. But although the insights offered on Episode 542 were originally aired in Episode 117, they’re still relevant for today’s investor.
As always, Jason’s editorial opens the segment, with a reference to an episode that aired prior to this episode’s original airdate, which focused on the unintended consequences of environmental policies. Jason points out that mandates from the environmental movement exclude people and hamper development.
Thomas Sowell: Academic, Author, Lecturer
Economist Thomas Sowell of the Hoover Institute at Stanford University is a prolific author and economics expert whose most recent book, The Housing Boom and Bust, examines the factors that created the housing collapse and its aftermath.
Although it’s all too easy to lay blame for the collapse on the predatory and often fraudulent lending practices of Wall Street bankers and their subsidiaries, Sowell points out that both the government and borrowers themselves contributed to the collapse.
In simple terms, the money financing Wall Street derivatives came from people paying mortgages. When they couldn’t make those payments, those mortgages fell into delinquency and the money going back to the banks dried up.
The Government’s Push for Homeownership
But why? To understand that, Sowell says it’s important to step back. The unbridled lending that characterized the housing boom has been blamed on Wall Street greed, but some of that lending came as a result of government pressure.
In the years leading up to the collapse, successive administrations had been advocating homeownership for all. The belief was that more people owning homes meant more stable communities and a greater sense of investment in the country as a whole.
The problem was, under lending standards of the time, a dismayingly large number of Americans simply couldn’t qualify. Many were from minority groups, but all of them had lower incomes and credit scores than those required to get a mortgage.
Enter acts like the Community Reinvestment Act and efforts to expand the scope of lenders like Fannie Mae and Freddie Mac. Banks were pressured to make mortgage loans available to just about anybody. To do otherwise was to be accused of discrimination against minority applicants.
But, Sowell tells Jason, the problem wasn’t one of race, but of income. And when those mortgages to ill-prepared borrowers fell into default, banks depending on those mortgage products began to collapse.
Government “Fixes” Don’t Fix Anything
What’s more, Jason notes, the housing collapse wasn’t consistent in all markets. Some areas had very high default rates, which created many vacancies, while others did not. That relates to the availability of “affordable” housing, which is rare in some areas.
The housing collapse points up the effects of government intervention to try to fix a problem that’s essentially nonexistent. Sowell notes that when government mandates to make more people homeowners collide with other directives to limit development in some areas, affordable housing becomes limited and prices rise, excluding many potential buyers.
That kind of exclusionary policy creates communities where housing is so expensive that many of the people who serve the community, such as police officers and service workers, can’t actually live there. They commute in from outside, where housing is more affordable. That’s the kind of thinking, says Sowell, that contributed to the collapse.
Another group to blame for the country’s housing trouble, according to Sowell, is the environmental movement, which often takes a hypocritical stance that excludes and disempowers people. Although environmentalists talk about limited open space for development, the reality is that there’s a great deal of available open space – and by placing restrictions on development, they’re closing off opportunities to the people who need them the most.
What does the future hold?
The economy is headed for a replay of the New Deal, says Sowell, with more and more government money being directed toward solving problems with housing and other issues. That means more regulation and overall imbalance in wealth and opportunities.
Is the US headed for some form of socialism, then? No, says Sowell. The country is really on more of a “fascist” track, where owners are controlled by the government. And it’s true that when people are afraid of a crisis, the government can do anything it wants to.
As the economy continues to recover from the housing crisis, Sowell predicts inflation, possible in the double digits – one way the government has of mandating wealth distribution. But that’s of dubious benefit, since inflation means the cost of debt goes down. Still, the amount workers take home in their paycheck is also smaller and daily costs are higher. In whatever form, though, Sowell sees a looming problem with debt, not just for the US but also for other players on the international stage.
Although Wall Street was the easiest target in the 2008 housing g crisis, there was, as Sowell puts it, plenty of blame to go around. And while, as Jason reminds his listeners, Sowell’s comments were made a while ago, the hidden mechanisms of the housing crash affect today’s investors too. (Featured image:Flickr/PAVDIV)
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