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Thomas Sowell on the root causes of the mortgage lending crisis

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Here’s a 33-minute video of Thomas Sowell explaining what caused the current recession.

He blames everybody, but Barney Frank and Chris Dodd most of all.

For those who cannot watch a big long video, here’s an article from Reason magazine.

Here’s a summary from the article:

Now, in The Housing Boom and Bust (Basic Books), Sowell contemplates the greatest expansion of government power in a generation, which was itself occasioned by the greatest economic crisis in as long. A quick but thorough guide to the causes of the crises, Sowell’s book shows how government policies led to a huge increase in highly risky housing loans. As he notes, the immense local variability in housing prices and failed loans reveals that the government mistook a set of local problems for a national one, and then imposed a single troublesome national solution. Sowell argues that while foolish decisions to indulge in complicated investment vehicles affected the specifics of how the financial contagion spread, at its root the housing problem is one of bad mortgages. And those came from bad decisions by government and by borrowers themselves.

And an excerpt:

reason: You parcel out some share of responsibility for the specific way the housing bust broke down to borrowers, lenders, financial markets, and the government. What was the borrowers’ share?

Sowell: There are those who borrowed to buy a place to live and speculators who borrowed to speculate, and did enormously well for a number of years. Then there were people who simply don’t understand complex mortgages, particularly people who never owned a home before and whose educations were limited. But the people I would blame the most in the sense that without their interference other problems would have been within manageable means are the politicians—people in Congress and the president and regulators—who pushed the lenders and the banks and Fannie Mae and Freddie Mac into lending and buying mortgages based on people who didn’t meet standards that evolved in the marketplace and which had worked. Those politicians, in addition to that initial mistake, ignored all sorts of warnings from all sorts of sources. As I list in the book, the Economist in London, Fortune, Barron’s, people at the American Enterprise Institute, all over the map, saw that this policy of encouraging homeownership at all costs was leading to trouble.

But the politicians clearly had as their political goal homeownership as “a good thing” and persisted—and for that matter persist to this moment in pushing it. The Federal Housing Administration last I checked was promoting supporting mortgages that have less than 4 percent down payment. We all make mistakes, but politicians have persisted in their mistakes, and in the pointing of fingers in other directions.

“Affordable housing” covers a number of things. There was this sense in Washington that the cost of buying a house had become a nationwide major problem which would require a federal answer as opposed to a local answer. All the data say that was not true. People weren’t paying a higher percent of their income nationwide for housing than they had a decade earlier. In fact, it was a somewhat lower percentage in some areas. Now in some areas, including California—coastal California—people were paying half their family income to put a roof over their head. That in turn was a result of local political people putting all sorts of restrictions on building.

Implicit in the idea of “affordable housing” is the notion that third parties know what people can afford better than those people know themselves. If you spell it out it sounds so absurd you wonder how anyone could have believed it. But for politicians the question is not, is it absurd? The question is whether or not the public will buy it.

reason: How much weight do you place on the notion that Federal Reserve expansionary money and credit policies primed the bubble, and bust, in housing?

Sowell: I find it hard to accept. I’m sure if the interest rates had been at 8 percent the boom would not have gone as far and the bust would not have been as big. I’m not saying monetary policy had no effect. But I am struck by the fact that Federal Reserve policy is nationwide, and in places like Dallas the increase in housing prices was in single digits and the decrease has been in single digits. So while Fed policy undoubtedly aggravated circumstances, it can’t be the fundamental cause because the defaults were so heavily concentrated. 60 percent of all defaults nationwide were in five states, and I suspect if you broke down the data even more you’d find specific regions in those five states very heavily implicated in defaults.

For more on the specific laws that caused the prices of homes to skyrocket in those 5 states, read this article.

Excerpt:

Let us go back to square one to consider the empirical consequences of policies in the housing market. Politicians in Washington set out to solve a national problem that did not exist — a nationwide shortage of “affordable housing” — and have now left us with a problem whose existence is as undeniable as it is painful. When the political crusade for affordable housing took off and built up steam during the 1990s, the share of their incomes that Americans were spending on housing in 1998 was 17 percent, compared to 30 percent in the early 1980s. Even during the housing boom of 2005, the median home took just 22 percent of the median American income.

What created the illusion of a nationwide problem was that, in particular localities around the country, housing prices had skyrocketed to the point where people had to pay half their income to buy a modest-sized home and often resorted to very risky ways of financing the purchase. In Tucson, for example, “roughly 60% of first-time home buyers make no down payment and instead now use 100% financing to get into the market,” according to the Wall Street Journal. Almost invariably, these locally extreme housing prices have been a result of local political crusades in the name of locally attractive slogans about the environment, open space, “smart growth,” or whatever other phrases had political resonance at the particular time and place.

Where housing markets have been more or less left alone — in places like Houston or Dallas, for example — housing did not take even half as big a share of family incomes as did comparable housing in places like the San Francisco Bay Area, where heavily hyped political crusades had led to severe restrictions on building. It was in precisely these extremely high housing-cost enclaves that the kind of people for whom the national housing crusade expressed much concern — minorities, low-income people and families with children — were forced out disproportionately.

Few things blind human beings to the actual consequences of what they are doing like a heady feeling of self-righteousness during a crusade to smite the wicked and rescue the downtrodden. Statistical studies about disparities between blacks and whites in mortgage loan approval rates might be said to have “jump-started” the housing crusades that began in the 1990s. Politicians and the media led this crusade, with many community activists following in their wake, much like scavengers, able to extract large sums of money from banks and other institutions by raising claims of discrimination, whose power to delay government approval of bank mergers and other business decisions made pay-offs to these activists the only prudent course for those accused.

I’m pretty sure that the San Francisco Bay area is run by leftists. And not moderate leftists – radical leftists. And I’m pretty sure that Dallas and Houston are not run by radical leftists. This crisis was local to areas that were dominated by Democrats who were passing all kinds of regulations and restrictions on the real estate market in order to drive up the price of their own properties and keep the “undesirable” minorities out.

I really recommend that everyone buy Thomas Sowell books and read them. I just finished “The Housing Boom and Bust” and am now working on “Economic Facts and Fallacies” and next up is “Intellectuals and Society”.

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Have the Democrats finally stopped spending money on bailouts?

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The AP reports that bailout spending is ongoing, despite Treasury Department claims that bailouts are over. (H/T ECM)

Excerpt:

The Treasury Department says its bank bailouts are over, but the spending continues.

In a Sept. 22 speech, Treasury Secretary Timothy Geithner said the bailouts “are completely behind us.”

That’s not quite correct. In the final six months in which it could spend money from the Troubled Asset Relief Program, Treasury set aside $243 million for new contracts for law firms, accountants and money managers to help run what’s left of the bailouts – on top of the $529 million already spent on work by staff, private companies and other agencies. Many of the contracts last until 2019, and there’s nothing to stop the government from hiring even more help if it’s needed to chase down the remaining bailout money.

Treasury’s authority to spend more from the $700 billion fund expired on Oct. 3. The law requires officials to recoup as much as possible of the $185 billion still in the hands of shaky private companies. After all collections are made, the government expects to be out about $51 billion, mostly from housing programs.

Rising voter anger ahead of next week’s elections has made Obama administration officials reluctant to speak candidly about the ongoing cost of managing TARP. Politicians who voted for the TARP law now face tough re-election fights. By downplaying their efforts, officials sidestep criticism of bailouts that helped Wall Street without easing lending or keeping many people in their homes.

A government watchdog said this week that public statements by Treasury officials around the Oct. 3 deadline appeared designed to create a mistaken sense that TARP is over.

“The idea that TARP is dead is just not accurate,” said Neil Barofsky, the special inspector general overseeing the program, in an interview. “People can write its obituary, people can declare that it’s been put out of its misery, but there’s still close to $180 billion of TARP money outstanding, and $82 billion obligated to be spent.”

ECM also sent me this article from the Heritage Foundation which explains how to cut $343 billion from the federal budget without breaking a sweat.

 

Commentary

Rich Wall Street donors abandoning Democrats

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Story here in the leftist Washington Post. (H/T Wes Widner, ECM)

Excerpt:

A revolt among big donors on Wall Street is hurting fundraising for the Democrats’ two congressional campaign committees, with contributions from the world’s financial capital down 65 percent from two years ago.

[…]In reviewing the FEC records, The Post analyzed fundraising data for New York City and its suburbs in New Jersey, on Long Island and north of the city — a region that had become an outsized source of Democratic campaign cash. In the 2008 cycle, 28 percent of the two committees’ itemized individual contributions came from the region. Manhattan alone accounted for 20 percent.

In this election cycle, the percentage raised in New York is less than 10 percent of the total.

More than 600 regular donors from the New York area — whose four- and five-figure checks added up to $10 million for the DSCC and DCCC in 2006 and 2008 — have so far abandoned their effort to retain the Democratic majorities.

Take Jamie Dimon, the head of J.P. Morgan Chase, who is known for his close relationship with President Obama.

In 2006 and 2008, he donated $65,000 to the Democratic committees. This election cycle, he has not contributed at all to the DSCC or DCCC. At the end of March, however, he gave $2,000 to the campaign of Rep. Mark Kirk (R-Ill.), who is seeking to claim Obama’s former Senate seat. A spokeswoman for Dimon noted that he has given to individual Democratic candidates, just not to the campaign committees.

Other prominent Democratic donors who have not given to the Democrats this year include Leon Black, a co-founder of the $53 billion New York-based Apollo Global Management a private-equity firm, and his wife, Debra Black. The couple gave more than $200,000 to Democratic congressional committees over the previous two election cycles but have not given this year, according to the latest disclosure documents. A spokesman for Apollo declined to comment.

Lloyd Blankfein, chief executive and chairman of Goldman Sachs, has not donated to the Democrats, either, after giving $50,000 in the previous two cycles. A company spokesman declined to comment.

The problem has been particularly acute for Senate Democrats, whose previous DSCC chairman, Sen. Charles E. Schumer (N.Y.), had strong connections to Wall Street.

Wow, bet you never knew that big Wall Street bankers were all Democrats, did you?