The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare...
We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default...
Congress's response to the present crisis is, not surprisingly, more of the same. The legislation enacted last week adds new subsidies to the old. It creates more tax breaks; most first-time home buyers could receive a $7,500 tax credit. It expands the lending authority of Fannie Mae and Freddie Mac. Previously, the permanent ceiling on their mortgages was $417,000; now it would be as much as $625,500. And the FHA would be authorized to support, at much lower monthly payments, the refinancing of mortgages of an estimated 400,000 homeowners who are in danger of default.
More subsidies may -- or may not -- stabilize the housing market in the short run. But there are long-term hazards...
... the government's pro-housing policies contributed in two crucial ways [to the current crisis].
First, they raised demand for now suspect "subprime" mortgages. The Department of Housing and Urban Development sets "affordable" housing goals for Fannie Mae and Freddie Mac to dedicate a given amount of credit to poorer homeowners. One way Fannie and Freddie fulfilled these goals was to buy subprime mortgage securities -- many of which have now gone bad. Second, government's housing bias created a permissive climate for lax lending. Both the Clinton and present Bush administrations bragged about boosting homeownership. Regulators who resisted the agenda risked being "roundly criticized," notes Zandi.
... When tomorrow's housing crisis occurs, we will probably find its seeds in the "solution" to today's.
Wednesday, July 30, 2008
Samuelson: The Seeds of the Next Housing Crisis Are Being Planted Today
Robert Samuelson at WaPo details the many ways the government fueled the out-of-control housing market and how they are planting the seeds for the next crisis. Samuelson fails to point out the Federal Reserve's role by printing money and keeping interest rates dangerously low, but, otherwise, Samuelson nails it:
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