Status Updates From The Housing Boom and Bust

"The point here is not that these particular decisions were bad in themselves--everyone has to make ad-hoc judgement calls at one point or other. But a government's ad-hoc decisions provide no reliable framework for the decisions to be made by millions of other people subject to the government's rules (when those rules are difficult to discern.)"

"Many political quick-fixes pay little or no attention to how those quick-fixes change incentives and constraints on future behavior."

"Inflation is not the only legacy of runaway government spending. A growing national debt can be regarded as The Ghost of Christmas Past."

"Free down payments carry catastrophic risks. Transferring the risk of home-ownership from buyers to taxpayers does not endow virtue in America. Giving people a hand-out that leads them to financial ruin is wrecking-ball benevolence."

"Both the unrealistic nature of policies pursued in the name of affordable housing--and the serious danger that such policies posed to the entire economy--provoked many warnings from economists and others. But these warnings were repeatedly brushed aside by political leaders. Often by shifting the focus to the supposed benefits of creating more home ownership through affordable housing."

"The facts could not be plainer. Market criteria had long required such things as substantial down payments, as well as income and credit histories that make continuing payments likely. But all that was brushed aside in the political crusade for affordable housing, and bigger home ownership statistics."

...unintended consequences? Or foreseeable downward spiral...?

"Both the genesis of unaffordable housing in particular local areas, and the responses of national policies to make buying a home easier, were political in origin. And government regulation is what forced lenders to meet arbitrary quotas by eroding traditional mortgage lending safeguards."

"Placing the roots of the housing boom and bust in the market, and the solution in government, is very convenient for politicians--and for those who favor government interventions. But such explanations are inconsistent with facts--however impressive they might be as exercises in rhetoric."

"In short, the policies and practices of many institutions--local and national, public and private--set the stage for the housing boom and the housing bust that followed."

Which is to say, the increasing riskiness of the assets of these two mortgage market giants was an increasing riskiness for the taxpayers, whether the taxpayers knew it or not. Moreover, creative accounting within Fannie Mae and Freddie Mac themselves concealed the full extent of the risk until independent audits turned up discrepancies at both places, which led to the resignation of the heads of both institutions.

"Although Fannie Mae and Freddie Mac are officially private profit-making enterprises, their size--and the federal government's involvement in both their creation and their ongoing operations--led many investors to assume that the federal government would never allow them to fail."

TOO BIG TO FAIL. I remember this mantra...

"Moreover, even though racial bias charges provided much of the initial impetus for greater federal involvement in private mortgage lending decisions, once federal regulatory agencies became involved, that involvement spread far beyond issues of race; and the policies imposed required a lowering of mortgage loan approval standards across the board to people of all races."

"Whatever the merits, or lack of merits, of the logic or evidence on which charges of biased lending we based, the political impact of such beliefs has been powerful."

"People who are quick to denounce corporate greed often argue, inconsistently, as if lenders are arbitrarily withholding their favors from people they don't like. Lenders are not doing favors by making loans any more than Campbell's is doing favors by selling soup. Lenders would be cutting their own throats financially if they arbitrarily denied loans to people with good prospects of paying them back with interest."

"Whether or not programs or policies to artificially lower housing prices or monthly mortgage payments have been enough to offset other government policies that artificially raise housing prices, both local and national government policies are among the factors which have set the stage for the housing boom and bust."

"In other words, they do not seek to reduce the government's role in the housing market, but to increase it. They do not seek to lower housing costs, but to conceal housing costs with taxpayer provided subsidies--or with laws that prevent those costs from being expressed in the prices charged."

"Advocates of affordable housing seldom, if ever, seek to remove government restrictions that have led to higher housing prices. Instead, they seek various ways of either forcing the private sector to charge lower home prices and lower apartment rents, or else they seek to use the taxpayer's money to subsidize housing in one way or another."

"Nor is this pattern confined to the United States. As noted in chapter 1, in 23 of the 26 urban areas around the world where housing is rated 'severely unaffordable', there are severe land use restrictions under the heading of 'smart growth policies.'

"Where there is the greatest government intervention, housing is least affordable."

"Much of political rhetoric serves as a substitute for reasoning."

"Minimum lot size laws ensure that the land costs of building a house will be vastly greater than otherwise, and housing costs correspondingly beyond the reach of most Americans. It is a way of surrounding upscale communities with a wide buffer zone, keep less affluent people at bay. The resulting high costs of housing do not adversely affect the homeowners already living in the upscale community."

"As a former governor of the Bank of New Zealand put it, in another international study of home prices: "The affordability of housing is overwhelmingly a function of just one thing: the extent to which governments place artificial restrictions on the supply of residential land.""

Whelp...
This is all starting to make a lot more sense.

Economists are the most frustrating kind of authors because their pretentiousness oozes off the pages, but they are right 99% of the time.